Financial planning for the young

anuja asked, what should we see when we are investing in mutual funds, is it advisable to invest in growth funds which are risky also?

Vetapalem Sridhar answers, Dear Anuja, This is a gud Q. It is difficult to answer it in a short time….But for a common investor the following factors should be considered…these r not comprehensive but would be a gud start to learn more about MF's:

1. Fund mgmt team -- If the Fund mgr has been around for a while, by looking at past performance we can get some idea about the fund mgmt abilities. Also whether there is a sound investment process that is followed is important. The performance of the fund should not just depend on the skill of just a single person.

2. Fund Size -- A medium sized fund would be ideal to balance between the flexibility for a fund mgr to invest and the sharing of costs. Too large a fund and ability of the fund to exit and enter stocks is not great. Too small a fund a size and the cost burden becomes higher.

3. Fund House Philosophy -- It is important to be comfortable with the company that u r planning to entrust ur hard earned money with. To this end the credibility of the Mutual Fund House is important.

4. Past track record of the specific MF scheme -- it is more advisable to invest into existing MFs that have a been around for some years rather than go for a NFO.

5. Type of Stock Universe that fund invests in -- Funds invest with a specific mandate, Large Cap, Mid Cap, Small Cap, Sector Funds etc. Each category has different amount of risk associated with them. So the selection should be done on the basis of ur risk profile and the horizon of investment. The greater the horizon the more the risk taking ability. To create wealth in the long run some amt of investments into assets with higher risk is necessary.

Harry asked, Hi Sridhar, How abt savings using Section 88?

Vetapalem Sridhar answers, It is now u/s 80C that u can save tax by investing. Among the options available, ELSS Mutual Fund schemes have potential to generate more wealth in the long run.

Jeba Kumar asked, Hi Sridhar I draw a Salary of RS. 11,000/ - pm. I Invested in Money Back Policy Rs. 7,000/-, endowment plan Rs. 15007/-, Money Plus(ULIP) Rs. 10,000/-. I have opened a RD of Rs. 3,000/- pm for a year to keep reserves for LIC permium payment. Now i have to think of Investing in Mutual Fund (ELSS) on SIP of Rs. 500/- p.m. Kindly guide me whether i should go for Reliance tax saver or SBI magnum tax gain. Whether it ideal to invest in PPF?. I have planned to procure flat with in 3 years how i should plan it?

Vetapalem Sridhar answers, To create wealth over the long term, the above choice of investments would not do much gud. U need to increase ur allocation to Equity oriented investments… To understand more about the role of asset allocation in creation of wealth over the long term read thro the following article that I has written some time back http://www.rediff.com/getahead/2007/jul/03fin.htm. Any of the above ELSS schemes would be a gud option to start of with. But considering that u plan to invest in a house, u would need to create enough financial resources towards down payment. With this in mind any lock in product (including an ELSS MF) would not be a suitable option.

vin asked, Please Reply me I need 1cr. in 16 yrs. what would be my investment planing. i m investing Rs 3000/month in mf like Relience Growth, hdfc equity, SBI Contra, Reliance Opportunities need more investment to acheive target? where to invest ? how much?

Vetapalem Sridhar answers, U will need to invest Rs 12K p.m. and this money if it grows at an annualised rate of 16% p.a. u would end up with around 1 Cr in 16 yrs. Ur start is gud, u can increase the amount u invest as ur earnings increase in future. The fund selection is OK. Always invest with a long term focus in equity oriented investments to create wealth. U can read thro the following iink to know why long term is recommended. http://www.rediff.com/getahead/2007/sep/14stocks.htm.

ABHIJIT asked, Hi Sir, I am 25 yr old last child having no responsibility at home and working in an MNC as Product Manager having salary Rs 2.3 lacs p.a.apart from this i am having avg income of Rs 8000/month from share market from last 3 months. Currently total corpus available with me is Rs 1.9 lacs as i started earning from last year currently. Expenditure/ month is very less i.e. Rs 3500/month. I am planning to getting married by end of this year also want to buy 1 BHK worth say Rs 30 lacs by next year. Please suggest me to become successful in my goals.

Vetapalem Sridhar answers, Dear Abhijeet, U seem to be trading in the stock mkt to make some addditional money. Over time very few people consistently keep making money thro trading. Even if u plan to continue trading limit the amount of money that u allocate towards it. At this stage in life focus on creating some fund as u plan to get married soon. Also u should focus on creating further savings to pay for the down payment of the house u plan to buy. As these objectives r hitting u in the short term....equity is not a suitable option currently.

imran asked, hi, i earn Rs. 25,000/- per month. Could u advise me where can i invest?

Vetapalem Sridhar answers, Dear Imran, Of the savings that u r able to accumulate at the end of each month, find out how much u can invest with a 5-7 yr horizon. This money should go towards equity oriented investments. Also if u have any outstanding liabilities or dependents on ur income, go in for a suitable Term insurance policy. Any money that u would require within 1-2 yrs, keep it liquid in a bank FD.

dinesh asked, Hi Sridhar,I am 30 yrs of age and my salary is Rs 14000/-p.m My investment in Ins policies per annum is Rs 10500/ (ICICI endowment plan) Rs 7000/-(LIC money back) and Rs 10000/-. (Bajaj ULIP) Apart i have invested Rs 10000/-in MF. I have a son Aged 1 yr and i want to buy a house and save for my retirement age. kindly guide me for further investments to achieve my target.

Vetapalem Sridhar answers, Dear Dinesh, Plz understand that other than Equity based ULIP plans all other Insurance based Investment Plans r merely a savings tool. The long term return is just about that of the inflation rate. This is effective in portecting the purchasing power of money, but it does not create real wealth. As u have dependents (including a 1 yr child) u need to take an adequate TERM INSURANCE policy. To create wealth over the long term the to best alternatives for a common person is either real estate or Equity. So at this point of time focus on investing into equity oriented MFs with a long term horizon (5-10 yrs).

anand asked, Hi, I earn abt Rs 50000 per month. Am 28, married and have a 9 month baby. what route should i take towareds wealth creation? should i buy MF, ULIPS,NSC,PPF??? pls suggest?

Vetapalem Sridhar answers, Take an adequate TERM Insurance. Invest into Diversified equity oriented MFs with a long term focus to create wealth. Keep adequte money in ur Savings Bank to cover for atleast 3-5 mths forwards household expenses. That money which u plan to use in next 3 yrs, put it into a FD or an Mutual Fund FMP (Fixed Maturity Plan).

Praveen asked, I earn a fixed gross of Rs.3.10 lpa and this is my first job from a few months back. What is best for a tax saving investment - PPF or ELSS? Is an ELSS SIP in existing funds safe - ie. retain atleast the same value of purchase? Are NFOs advantageous for a bigger sum investment? If I am to plan to study higher in 3 yrs.- any advice? Lots of questions - thanks for the reply.

Vetapalem Sridhar answers, ELSS is the best option with a long term horizon, say 5-7 yrs... U will find most answers if u read thro the other questions that I've answered. About NFO: Can u give me a sound reasoning why u should even consider investing in a NFO. I can give u a few sound reasons why u should not consider a NFO. They are:

1. For new funds the initial charges r higher (may go upto 6%). This higher charges r to recover the money spent on advertising, mktg expenses, investor meets and giving higher comissions to sellers to push a new fund.

2. In regular funds a MF Agent gets 2-2.25% commission. But in a NFO the commissions can go as high as 4-5%. Not to mention other incentive schemes where he gets a lump sum payout if he meets certain sales target. Also the top performing agents are sent on foreign trips. All this cost is recovered thro charges levied to the New Fund. This is the reason that u will find agents pushing new funds only.

3. U never see extensive mktg or advertsising of existing funds - reason, they r not allowed to charge higher expenses. The existing schemes have a past track record which will enable u to find out about the fund and how it has performed. The same cannot be said about new funds.

4. U must invest into existing funds unless there is strong a compelling reason to go in for a new fund. If u r able to answer this question then probably u may consider an NFO. The question is that what additional value is added to the portfolio by selecting a NFO over the other existing funds that r performing well in the industry.

Jyotiprakash asked, I have an taxable income of Rs 4.2 Lakh p.a. and my wife is having an income of Rs 1.2 lakh p.a..I and my wife are the joint owner of a land property on which we want to constuct a house thru housing loan. Which option will benefit us most in tax saving? Can you clarify for the case whether the loan should be taken in my name only or the loan should be taken jointly me and my wife? If the loan is taken in my name, then whether my wife can claim the tax benefit since she is the joint owner of the land?

Vetapalem Sridhar answers, It is best to take a joint loan with ur wife. Presently she does not come under the tax bracket...But in future when she does, both of u may be able to take the benefit of the tax laws.

zen asked, Dear Mr. Sridhar, I am a 28 yr old female with a daughter aged 2 yrs. My take home salary is about 28,000. My fixed monthly expense at least 10,000. Live in my husbands co. provided quarter. Objectives buy a home - asap Save for higher education of my daughter Retirement I have 2 PPF account 1 - mine 1 - for my daughter. I have invested in NSC's, and select few MF's of 5,000 each (SBI tax gain, DSP ML Tax saver, Fidelity Tax saver, ABN AMRO Opportunities) In addition I have a LIC policy for my daughter (where I am paying 14K annually) and a policy for self where I am paying about 2.8K per quarter) What is the best strategy that I must use to split my monthly salary as savings. How much put where on a monthly basis?
Vetapalem Sridhar answers, About investing for ur daughter. Plz read thro the following slide show (click on NEXT to read further) which comprehensively deals with this subject. http://specials.rediff.com/getahead/2007/aug/07sli1.htm.  All MFs r of similar type. Look at adding a Large Cap fund. Instead of PPF and LIC for ur child invest into MFs. Take up an adequate TERM INSURANCE policy. Create a Fund that would enable u pay for the down payment when u plan to buy a flat.

snigam asked, Hi I want to do regular invest for my 1 year old daughter, please let me know where should I invest for her, in mutual fund or on ULIP policy? Another question is there any policy in which I can create Child trust fund in Indian market?

Vetapalem Sridhar answers, About investing for ur daughter. Plz readi thro the following slide show (click on NEXT to read further) which comprehensively deals with this subject. http://specials.rediff.com/getahead/2007/aug/07sli1.htm.

suyog asked, Hi Sridhar I am drawing a salary of Rs 10 lakhs, I have invested in PPF and LIC, please guide me a investment plan that will reduce my tax liability and generate good returns for me in long term?

Vetapalem Sridhar answers, Primarily u can save tax by investing upto 1L u/s 80C. LIC and PPF would qualify. If the 1L limit is not covered then add an ELSS MF for the same. The second major avenue to save tax is to buy a house. The interest upto 1.5L is exempt from tax.

Purusotam asked, Hi, I am planning to invest in MFs thru SIPs. can you pls tell me some good funds?

Vetapalem Sridhar answers, I have already answered on how to select a MF. U can go thro http://money.rediff.com/money/jsp/mfsearch.jsp to pick funds. Ideally u can create a well diversified portfolio with around 4 to 6 funds. It does not make sense to increase the number of funds. A large cap, a diversified, a Mid cap and an opportunities fund would create a well diversified portfolio. In addition u can pick a ELSS fund for the sake of investing to save on tax u/s 80C.

MANISHNA asked, Hi sir, I draw nearly Rs 35,000, can you please suggest some saving options which will be fruitful to me as well as to my parents?

Vetapalem Sridhar answers, Dear Manisha, If ur parents r dependent on ur income then u must take adequate TERM Insurance Cover. This would ensure that the persons dependent on ur income would not be put into any financial discomfort in case of any eventuality. All money that u can keep invested for a long term horizon (5-7 yrs) should go towards equity oriented MFs.

NAV asked, I have a house on my name in UP which is being used by my wife and children. I live on rent in Delhi because of my job. Can I claim exemption on account of rent out go?

Vetapalem Sridhar answers, Though I'm not a Tax Specialist, I'm aware that u can claim HRA exemption for ur case. Plz consult a tax specialist for the same. In addition if u have a housing loan on the owned house, u can claim both benefits i.e. for the EMI (Upto 1L u/s 80C of principal component and upto 1.5L of interest) as well as the rent that u pay for ur specific case.

Aj asked, I am 28 yrs and have a 1 BHK flat in Pune (no EMI to be paid). My take home is Rs 50000. Should I look for a bigger home (may be required when I'll get married) or invest in some better avenues? A bigger home is out of reach as of now seeing the real estate. Kindly advice.

Vetapalem Sridhar answers, Dear Aj, When u convert a smaller property into a bigger one, the only thing that the decision needs to be based is on whether the additional outgo is within ur reach. As u already own a property, if the property prices increase in general, the value of ur existing property too would increase.

basant_24 asked, hi sir, m 23 old arning Rs 25 k pm if i need Rs. 50 lakh at the age of 40 how much amount should i invest pm from nw? and where? please sugest.

Vetapalem Sridhar answers, Dear Basant Assuming that u invest Rs 5K each month till ur age of 40, and this money continues to grow at 16% annualised, u would end up with Rs 50L. But u need to understand that assuming that inflation is 6% till ur age 40, then the purchasing power of the 50L then would just about equal around Rs 18.6L in today's terms.

shane asked, i am earning say around Rs 2.5 lacs. planning future studies. how feasible would it be for me to invest into stocks? what would be a better idea?? stocks or mutual funds?

Vetapalem Sridhar answers, If u plan to use this savings to fund ur education in the coming 2-3 yrs, equity is not the place to invest the money. It would be better to keep it in FDs.

vincentp asked, The PPF balance in my a/c is 300,000, my wife PPF is 350,000, my LIC annual premium is 20,000 and my Wife 's LIC is 51000 annually we hv two kids (age 6 and 3) and hv PPF balance in their name totalling 200,000 and some neglible investments in shares our current monthly exps are 30000-40000. Could u suggest a plan to ensure my children's education is taken care and my retirement life is easy... even a genral advice will do taking some realistic assumptions.

Vetapalem Sridhar answers, U need to increase the investment towards equity. Equity based MFs would generate more wealth than the PPF accounts that u r investing in. Altleast for ur children start investing into equity oriented MFs.

arul asked, Hi Sridhar, how much can a person invest in the share market, i am asking about the percentage of the salary?

Vetapalem Sridhar answers, This is no relation in terms of % w.r.t. salary and investing into Equity. A investment option should be decided on the objective of investing, risk appetite, horizon of investing and the amount of returns expected or needed to be made.

atul asked, hi i'm getting 18000pm salary.and my monthly expenses are around 8000.i want to invest in share market pls suggest a strategy.

Vetapalem Sridhar answers, Strategy is simple. Invest for the long term. Read thro the following link to understand why. http://www.rediff.com/getahead/2007/sep/14stocks.htm.

ranjesh asked, My husband and i together earn Abt Rs 40,000 a month. He is 27 and I am 24. our monthly expense is about Rs.8000. We plan to buy a car in the coming months (EMI abt Rs 5000). How do you think we must invest the rest of the money? Do you think we can look at taking a home loan?

Vetapalem Sridhar answers, U r able to save around Rs 30K p.m. This is gud. if u plan to pay Rs 5K for ur car, u will be left with around Rs 25K. If u can get a flat thro a Housing Loan that u can afford, it would be a gud idea to go for it. Assuming EMIs would remain constant, any increase in salary in future should be invested to create financial resources for ur future.

Gina asked, Which is the best mutual fund out there? What are the factors to look out for before zeroing on one?

Vetapalem Sridhar answers, Dear Gina, U can look at the past and say that X fund is the best performer. It is not possible to know before hand which fund will be a best performer in future. If this were possible then each person would invest only in this best fund and all other funds would be out of business. I have already answered on what factors to evaluate to select a fund.

mittul asked, Hi my name is miitul and my salery is 50k per month and i want at 1cr in next 20yrs how much should i invest and in which scheme please guide me sir .

Vetapalem Sridhar answers, Dear Mittul, If u invest 10K each month for the next 20 yrs and this money continues to grow at 13% annualised, u would end up with around 1.1Cr at the end of 20 yrs. The purchasing power of this amount considering an inflation of 6% over this tenure would be around 35L in today's terms

apollo asked, Dear Sir Sridhar, I am an NRI with 2lacs Rs income per month. My EMI for my flat in mumbai is 50K rupees. How can I do a valuable investment with the rest of my income ? Please advise.

Vetapalem Sridhar answers, Dear Apollo, If u plan to settle down in India and assuming that u can save and invest around 50K each month, u can achieve financial freedom quite early in life. As u r well off in ur profession, u should invest the money into Indian equities with a 10-12 yrs horizon.

ramana babu asked, Dear Mr.sridhar, pl. tell me if we want to take Insurance, whether LIC gives good benefits or private players?

Vetapalem Sridhar answers, The primary reason to take Insurance should be to cover the risk of loss of income (due to death). In case ur income stream is hurt then insurance would protect the people dependent on ur income and ensure that they r not put into financial discomfort. No insurance Co. is better or worse. U need to evaluate the objective of putting money into insurance. Once ur objective is clear then u should hunt for the product that meets this specific objective for the lowest cost. If ur objective is being met, it does not matter what other companies r offering.

Natarajan asked, Dear Mr. Sridhar, I am 37 yrs old. Mfs are the best option now or can i go for some pension linked saving plans?

Vetapalem Sridhar answers, Existing Pension products r highly inflexible. Although it ensures discipline (the problem which most people face), there r better alternatives available thro which u can create more wealth in the long run. If invested with discipline Equity oriented MFs would be a superior alternative to create wealth over the long term.

ravi asked, Dear Sridhar can i buy house from my father by taking home loan?

Vetapalem Sridhar answers, Yes u can.

NiravM asked, Hi, I am 23, single, I earn around Rs 10 lac p.a., currently I have sip in the following funds dsp tiger, reliance vision, birla midcap, tata equity pe, icici dynamic, Rs 4000 each pm net Rs 20,000, also I have divided Rs 1 lac in in the foll elss schemes sbi tax gaim, dsp tax saver, fidelity tax adv, also I plan to double by sip investment by the end of the year please advise if i should distribute the money in existing sip's or start new one's? Please reply

Vetapalem Sridhar answers, Have already answered regarding creating a MF portfolio. Plz read thro it. The existing number of funds r gud enough. Evaluate at the end of 3 yrs whether u should continue with the funds r switch them to better performing funds. Ideally u would need to change a fund in 5 yrs.

RaviSingh asked, Hi Sridhar... I and my wife bring home around Rs 1L pm. We have a H/L and Car Loan for which we pay around Rs 37K pm, LIC pre.is around Rs 12K pm and other expenses are around Rs 25K (which also includes 3K SIP). After this I am left with 25K pm, which is mostly lying in Savings.. cud u plz. advice me how do we invest this (shud we go for 2nd home to generate wealth or invest in shares etc).

Vetapalem Sridhar answers, I have run a simulation for ur case. As some info is missing I'm assuming certain things. 1. Ur age is assumed as 30 yrs and the money should last u till ur age 85. 2. Ur cost of living is currently 30K p.m. (which includes ceratin yrly expenses too like vacation etc.). This cost of living is assumed to rise by 7% (including inflation) each yr till ur age 85 yrs. 3. U invest 3L this yr and increase this amount by 10% each year. 4. This investment grows at an annual rate of 13% over the next 30 yrs. And then drops to 12% for the next 10 yrs. It drops to 11% rate after a further 10 yrs and remains constant. Certain tolerances have been considered for the existing loans. In such a case u can achieve Financial Freedom in around 12 - 15 yrs. i.e. u would have accumulated around 1.6 to 2 Cr which would sustain u till ur age 85 yrs.

Vetapalem Sridhar says, Ok Friends....I've run out of time for now...It was gr8 answering ur queries...Will be back soon to answer more in the future....