Don't know how to save?

Since I have just started earning, I don't have any savings.

But, I have taken an insurance cover of Rs 1,00,000 - an endowment policy - which will mature in 2033. I am paying a quarterly premium of Rs 784 towards it.

 Where must I invest? Unit-Linked Insurance Policies, mutual funds or fixed deposits?

How do these funds sound: SBI Magnum Taxgain, HDFC TaxSaver, Reliance Growth and Reliance Equity?

- Christopher Ebenezer

Dear Christopher

I will first answer your question: "Where must I invest?" and then I will ask you a question, which in my opinion is as important as the one you ask.

We invest money so that it can earn a return. There are a variety of instruments available, each giving a different return.

Then why isn't everybody choosing the instrument with the highest return? Simple because typically the instrument with highest (potential) return has also a large amount of uncertainty.

What we are therefore searching for is an investment that has a return that more than compensates for the uncertainty (which we might want to label as risk). And that search isn't simple because there are no guaranteed returns.

Very rarely are all investment needs are met by post office schemes or the RBI bonds. One of the best vehicles for long term investment is equity.

For equity investing, I find that mutual funds tend to be a reasonably good investment vehicle. They are administratively easy and, because they spread their research and administration costs over a large amount of money, they work out as economic investment vehicles for most investors.

So where do you invest? I would suggest that, for money you want to put away for over 10 years, actively consider equity mutual funds like Prudential ICICI Discovery Fund, HDFC Equity Fund and Templeton India Growth Fund.

For short term requirements (three to five years) bank deposits, RBI bonds and post office schemes might work well since your tax bracket is low.

Unit linked insurance plans are usually very expensive vehicles, so please understand all the costs and alternatives carefully before using them. In fact, I would like you to evaluate carefully any insurance plan that gives you money back while you are alive, including endowment plans.

Now the question that I want you to be asking: "What are the important events in your entire life that will require substantial monetary resources, when will they happen and how much money will you require?"

Your decision on how much and where to invest must be made so that you can gear yourself to meeting these requirements. You may want to do that now or a bit later.

But that, in my opinion, that the most important question you need to address.

Also read: Too many dependents? Here's how to manage

Illustration: Dominic Xavier

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