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Of Jobs and Buying Gold

Author: Col Sanjeev Govila (retd)/Friday, January 27, 2017/Categories: Ask the Finapolis

Of Jobs and Buying Gold

I have started job from last month. I want to buy mutual funds which are safe and give steady returns. What funds should I buy and from which AMC? - Neha Pansare, Nagpur

Congratulation on your first job. It’s good that you have decided to invest right from the beginning of your job – that is very encouraging and very good for your future financial life. There are two types of mutual funds – Equity Funds which invest in equity or stocks; and Debt Funds which invest in fixed income instruments and do not invest in equity. The latter are considerably safer and less volatile than the former. All sorts of combinations of these two types of funds are also available in mutual funds universe. But please remember that this safety comes to you at the cost of possible lower returns in the long run. Since you are young, it will be good that you start reading about equity, understanding its nuances and start becoming comfortable with it. 

When you’re able to do so, and start investing in equity, you would have started on to the path of long-term investing advantage. So, my recommendation to you is to slowly start investing in equity funds through the route of Systematic Investment Plans (SIPs) as and when you start understanding this asset class. There is no rule or research to prove that buying mutual funds from a particular AMC are better or provide you safer and steadier returns. Look for good funds that meet your requirements rather than to any particular AMC. You must do adequate
research to build a good portfolio as per your requirements and risk comfort level. The portfolio must be reviewed at regular intervals and re-balanced if required. We should invest as per the requirement of amount, whether short term or long term. If you feel you do not have the skills, time or inclination to do the hard work associated with research and monitoring your investments, it would be good to consult a financial planner who will assist you with
these financial decisions.

My bank has reduced interest rates a little, and now I am saving Rs 500 per month on my home loan EMI. Should I invest this money in something, or should I keep my EMI the same and reduce tenure? I have total Rs 33 lakh home loan with 27 years of loan remaining? - Sanjit Arora, Noida

The default option of most of the home loan providers in such a situation is to reduce the tenure of the loan while the EMI remains the same. However, the answer to your query is not that straight forward. Please remember that you’ve take an unusually long-tenure loan. While you get a tax rebate which decreases your overall rate of interest, you would still end up paying a large amount of interest over this long tenure loan. Assuming you’ve taken a 30 year loan at 9.5% interest, you should know that for every Rs 100 of the principal amount borrowed by you, you would pay Rs 200 as total interest. Had this loan tenure been half of this period, ie, 15 years, you would’ve paid just about Rs 87 as the total interest. Even if you are in 30% tax-bracket and save the maximum possible tax on this loan interest, you would still pay balance 70% of the interest. So, my suggestion to you is to keep the EMI the same. As such, a small amount of Rs 500 per month will not make much of an investment anyway. In fact, I would tell you to try and reduce this loan tenure further by pre-paying small amounts frequently, as permitted by your
loan agreement. Any amount that you pre-pay will straightaway reduce your principal amount owed by you. 

According to you Sir, what should be the amount deployed in stock market? I am willing to make 100% equity investments on my own but my wife insists some money should go into provident fund and into buying gold. however, I am not interested in these investments because they will not give good returns. I like to see good returns and I am doing nicely with stock picks. - Paras Vakil, Solapur 

Personal investments should be a comfortable mix of various asset classes. Recent good returns should not be the only criteria for investments. And the comfortable mix primarily refers to equity, debt, gold, and real estate. Just because your equity has given good returns in the past, it is no guarantee that it will do so forever and every time. Historic asset class analysis has clearly proved that, in the long run, your correct and balanced mix of various classes of investments is more important than, say, timing the market to get a particular class, like equity, right. This comfortable mix of asset classes should flow from your future requirements and risk profile, rather than mere gut feeling borne out of recent good experience with an asset class. 

Eg, if you invest fully in stocks and need to redeem the same due to an emergency or even a scheduled requirement, but the stock markets are quite down, you may either have to borrow money by taking a loan or the requirement of the emergency may suffer partially. Hence, do not bet on one asset class and diversify your investments, lest you face disappointments in future if a requirement comes.

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