Either you are growing in life or you are rotting in dark chambers. As change is the only constant in life, it’s always better to stay prepared and plan for the future. Stagnancy is simply not an option. With each passing day, globalization is putting its strong imprints on Indian economy. But, higher coupling of Indian economy with global forces creates its own share of troubles. Job security is a thing of the past. With shrinking job opportunities in public sector space, private sector has emerged as the major source of employment. While on one hand, this has created uncertainty to the traditional sense of job stability; on the other hand, this has led to creation of myriad opportunities in both professional and entrepreneurial space. Further, with the near absence of social security net and disintegration of joint families in India, it has become imperative to fend for your own.
In this perspective, a little planning will create a better future which will provide adequate financial and social security. And this planning spanning over 5 years will encompass both professional and financial space. Apart from investing in various financial assets, reducing irrelevant expenditure should also be part of this process.
Investing in financial assets:
‘You must gain control over your money or the lack of it will forever control you,’ said Dave Ramsey. Therefore, financial planning is a must to gain control over your finances and to achieve financial goals. If you are a mid- career professional with an average earning of around Rs 8 lakh per annum and a disposable income of around Rs 15,000 per month after covering all kinds of financial obligations, then this article will make an effort to provide a blue print for your financial planning.
Financial instruments like mutual funds, insurance, gold ETFs, government-sponsored social security schemes like PPF and NPS can be considered as part of this financial planning to garner better returns along with building up a decent retirement corpus.
Mutual funds are proved to be one of the greatest wealth creators for retail investors in the last decade in India. As individual investors, who are working or self-employed, don’t have the time and bandwidth to invest in direct equity, it is always better to put your money in the experts’ hands. And mutual fund provides that opportunity. As we are discussing financial planning for a mid-career professional, it’s advisable to have higher exposure towards equities through mutual fund route for higher returns. SIPs or systematic investment plans are the best options available for an individual investor to save a fixed amount of money every month that will have the advantage of compounding over a period of time. Within the SIP world, Equity Linked Savings Schemes (ELSS) can be explored to generate higher return with an added advantage of tax savings. There are various mutual fund schemes floated by different companies in ELSS space and you can choose a couple of them to put in a fixed amount every month in the form of SIPs. “ELSS is a very good tax savings instrument as it provides better returns, higher liquidity with lesser lock-in period,” Rohit Grover, Certified Financial Planner at Mumbai-based advisory firm, MoneyFrog said.
As the article assumes your disposable income at Rs 15,000, you can put in around 70% of this amount or Rs 10,500 in mutual fund schemes. As you are a mid-career professional, you can increase this amount as salary goes up. However, for a conservative investor who is not comfortable with equities can explore the option of investing in hybrid mutual funds. Typically, a hybrid fund invests in a mix of stocks and bonds. This will provide an option of diversification to the investors with a possibility of garnering decent return. A monthly investment of Rs 10,500 in SIPs for 5 years at an expected rate of return of 12% will generate a corpus of close to Rs 9 lakh for an investor. This amount can be utilized to build up a solid financial foundation in the form of retirement corpus or to fund child’s education or marriage in the next 10 years.
Other investment avenues:
Apart from investing in direct equities through mutual fund route, there are other financial avenues available for an individual investor to build up a sound financial base. Long-term savings instruments like Public Provident Fund (PPF) and National Pension System (NPS) come under this category. PPF is a savings instrument which predominantly invests in government bonds to generate returns for subscribers. It falls under the EEE (Exempt, Exempt, Exempt) category, making it one of the finest avenues for tax savings. As it is a long-term debt product with a 15-year maturity period and is extendable by 5 years post maturity, it is advisable for an individual investor to open a PPF account and put in money every month like an SIP. “An individual investor should save small amount of money every month in PPF like a SIP. He should not bother about saving higher amount in PPF during first 5-7 years of his career and should allocate more money to equity. As salary goes up with years, he should save more money in PPF as this debt instrument gives assured higher return than many other debt products,” Melvin Joseph, a Sebi registered investment adviser, and founder of Mumbai-based advisory firm said.
As an investor can extend the tenure of this product by 5 years post maturity without any cap on number of extensions, a midcareer professional as discussed in the present case should put in at least Rs 2,000 every month from his disposable income. This amount can be increased as the salary of an individual goes up with his experience.
With regard to NPS, current tax treatment provided to this savings product is not attractive for an average earner. Therefore, PPF is a preferred savings instrument over NPS in case of a midcareer professional with average earnings.
Meanwhile, holding physical assets in paper form also makes sense for a retail investor as part of the overall diversification strategy. Under this category, investing in gold ETFs can be explored. As buying and hoarding physical gold doesn’t give any return to an investor, it is better to hold the yellow metal in paper form by investing in gold ETFs. Ideally, around 5% of the total savings can be allotted to gold ETFs as it will provide a cushion against any steep fall in other asset classes like equity or debt.
How much insurance cover is enough?
Assuming that you are the only bread earner of your family, it is important to have adequate insurance cover to meet exigencies. In this perspective, insurance should be regarded as a financial product which will provide protection against any untoward incident like a job loss, disability or death. It should not be considered as an investment option as most traditional insurance policies provide low return as compared to other financial products. Against this backdrop, term insurance is the only policy which a retail investor should look at. Term plan is a life insurance policy that provides coverage to the insured person for a defined period of time. In case of death of policy holder, the beneficiary- who is usually a relative – claims death benefit from the insurer. As term plan is a pure protection policy, a retail investor should take a term plan as part of the risk mitigation measure. The good thing about a term plan is that an individual can take a large cover by paying a very low premium in case of a term plan.
Apart from term plan, health insurance is another necessity to take care of health-related expenditure. Even if your company provides group mediclaim insurance cover, it is advisable to have personal health policy to meet medical expenses in case of job loss.
Be responsible with money:
An average earner can’t afford to be indulgent. He has to be responsible with money. Therefore, demonstration effect should be kept at minimal levels and all kinds of unnecessary expenditures should be pruned. For example- use of credit cards for buying many fancy things, which one doesn’t require, should be limited. Piling high cost credit card debt has emerged as one of the biggest worries of present generation. So, an average earner should stay away from such high cost debt and be more responsible in his buying patterns. If a midcareer professional has piled up such debt, he should design a plan to retire such debt as fast as possible. Apart from this, over leveraging though taking up many loans will lock in most of the earnings towards debt repayment and will leave little for savings. Therefore, debt burden should be kept at minimum level and should only be taken to build up a long-term asset after taking into account one’s income flow and future earnings potential.
Self-investment is the best bet:
Self-investment is the best investment. If you are a professional, learning a new skill over a period of time will not only make you more employable, but also push up your earnings.
After the advent of globalization, skill sets have been prone to rapid change. And this requires a constant learning of new skills to stay relevant. In whichever field you are in, there are always opportunities for higher learning. As a midcareer professional, it is always desirable to pursue a professional course or take up small courses related to your field as part of your learning endeavours. This will keep you updated with the present trends along with making you eligible for a bigger job role in future. Apart from the prospects in employment filed, you can also retire early to make a living out of your new learning. The second income stream will be pretty much a possibility if you are hustling to complete your new course when the world is busy with other things.
Entrepreneurship is another possibility which a midcareer professional can explore. If ‘being your own boss’ is your calling, you should explore the possibility of make a living out of your present skill sets. Network with like-minded people and see if that’s a possibility in coming years. However, one should weigh both pros and cons of such decision before taking the plunge.