Sensex near 75K: 5 investments to get your financial journey right

Equities must be present in everyone’s portfolio, but that doesn’t mean you should take unnecessary risks. A simple combination of a Nifty 50 index fund and a Nifty 150 index fund might just be what the doctor ordered.

An investment has to be chosen based on two parameters – time frame of investment and risk.
The S&P BSE Sensex is hovering near all-time-high levels. And investors have caught the fever; the fear-of-missing-out (FOMO) virus. There are many queries about what the next best investment is. They are afraid of being left behind as equity markets race ahead, and perhaps seeing their neighbour or friend making more money than they have so far. The reality is that quick returns are a one-off and cannot be sustained. Further, there is no such thing as the best investment that will consistently give 15 percent returns without any volatility.

The question still remains: Where to invest and how to go about managing these investments? Here is a process with five products to get the financial journey right for new investors and for existing investors to do a check and course correction.

Expect the unexpected

Job loss, a sudden medical emergency in the family, large repair expenses—these are just some unexpected events that can occur. Most often, people believe this will happen to others and not them. And when such an unfortunate event befalls them, it is common to hear that investments are not accessible and one ends up relying on loans. Before jumping into investing or taking a loan, keep five to six months of expenses in a fixed deposit. This can help you tide over financial emergencies.

External health insurance for internal peace

The salaried, especially younger employees, tend to rely only on employer-provided health insurance. However, these days, people at all ages are getting various illnesses and the cost of treatment is skyrocketing, meaning that the typical Rs 3-5 lakh of insurance cover provided under a group insurance scheme would prove insufficient. Also, one has to factor in job insecurity and instances where people prefer to follow their passion projects rather than stick to.a 9 to 5 routine. Given this, it is imperative to have external health insurance of at least Rs 5-10 lakh to ensure continuity of heath cover.

Put simply, one should take the plunge into the investment world only after ensuring an emergency corpus and health cover.

The “best” equity fund portfolio

An investment has to be chosen based primarily on two parameters—time frame and risk. The time horizon should be based on a financial goal and the risk is based on the risk an investor can or needs to take. Often, there is a gap between the amount required to be invested for a goal and the amount one can actually spare. In such instances, the money may have to be put into higher-risk avenues to meet the goal within the set time frame.

Given long-term inflation of 6-7 percent per annum, investors will need to consider instruments that beat this rate. One such investment is an equity fund. There are many categories within equity funds and it gets difficult to choose the allocation between those focused on large-, mid- and small-caps. Further, mid- and small-cap stocks come with higher volatility, something most investors find difficult to deal with. Investors are also confused with various theme- and sector-based funds.

One simple strategy is to invest in a combination of a simple Nifty 50 index fund and a Nifty 150 index fund. While this may not necessarily give the highest returns, it firstly removes the choice dilemma and secondly, helps investors remain invested.

Investors tend to churn mutual fund portfolios regularly based on recent performance, thus earning lower returns than the fund. Further, the SPIVA India year-end 2023 report by S&P Dow Jones shows that in a 10-year period, more than 50 percent of funds failed to beat the benchmark on an absolute returns basis, thus making a case for passive investing.

Plan for the short term with debt funds

Equities are for the longer term (at least seven years). For goals falling within three or four years, short-duration debt funds are a better bet, providing consistent returns. These funds have high-quality bond portfolios and exhibit lower volatility compared to other debt fund categories. Short-duration debt funds are all-weather funds and make returns through a combination of accrual and capital gains. They are preferred over fixed deposits as they provide better flexibility on withdrawal along with the possibility of better returns due to active duration management.

Think retirement, think NPS

Investors are getting more conscious about investing for retirement early on, given the expenses and corpus requirement. The National Pension System has all the elements that can help reach the required corpus. The lock-in till age 60 ensures money is left to compound and the equity allocation ensures higher returns. The additional tax benefit over Section 80C instruments is another positive.

These five products can go a long way in simplifying and magnifying one’s financial life.

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