I’m 26 years old with a salary of ₹28,000. I plan to invest as I have started my job. My parents are suggesting chit funds, specifically KSFE. But recently, I heard about SIP especially in Nifty 50 and smallcase investments through my friends. As I am a beginner in the field of investing, could you provide me with information on what I need to be careful with in investing, and how to invest?

Aananth

There are three key things you need to take cognisance of when you invest: one, understanding risk and how much you can handle – whether you can stomach losses in market linked products (mutual funds, stocks including smallcase, etc). Two, having a goal or time frame for investing. Your time frame will determine what products you can choose and what to avoid. For example, stocks or equity mutual funds is okay for long-term investing of 5-years or over, but for goals of less than a year, they are best avoided. Three and very importantly, knowing whether the financial product you invest in is regulated or partly regulated or not regulated.

Some chit funds are NBFCs regulated by RBI and others are simply governed by the State in which they are registered. A few others are collective schemes without regulation. Either way, they are high-risk opaque products. Still, you have more contemporary products to invest in and a chit fund need not be your first option.

For beginners like you, bank deposits and/or PPF should form part of your low-risk investment. You can then venture into equity mutual funds through index funds like Nifty, Nifty Midcap 150 and so on. These are called passive funds and are low on cost and return as much as the market does. You can use the direct plan to invest in these. But have at least a 5-year time frame. Don’t venture in smallcase or direct stock investing until you get familiar with stock markets in a few years and your income also rises.

My late dad had recommended PPF, NSC and FD for us to invest in. I am wondering whether to go for another PPF with 15-year lock in and the other options he suggested. I earn about ₹92,000 per month after taxes and I have a home loan (₹17 lakh) running for ₹27,000 per month. I also have a car loan (₹5 lakh) taken last year July 2022 and paying EMI ₹8,700 a month. I have term insurance for ₹1 crore coverage and paying ₹74,000 annually premium, an LIC policy for my wife for ₹5 lakh, paying annual premium ₹27,000. I have two kids aged 11 and 7, and so far haven’t initiated useful plans for them. Their school fees come to about ₹1.3 lakh per year. Currently I have opted for NPS from my company. I have a PF amount accumulated to ₹17 lakh and we have savings account balance ₹15 lakh. Can I take out my entire PF account and close my home loan, or use our savings in the bank to close this home loan and keep the PF untouched?

Benny Premkumar

AYou can use market-linked regulated products for long-term wealth-building. A pure term cover of ₹1 crore cannot cost ₹74,000 premium. Please check if it is a cover plus a mix of any other money-back option or market-linked option. Whether it is your policy or your wife’s, avoid fancied policies and stick to a pure term cover for life. Stop the ones you run if they have crossed 5 years or so. You will be wasting premium on low-return policies if they are in money-back/endowment plans. Next, if you are getting deduction for home loan interest (which is outside 80C), you can continue your loan, periodically making prepayments. Instead try to first close your car loan which only adds to your monthly cash outflows without any meaningful asset as it is a mere consumer loan. Your PPF, NPS and some index mutual funds will help build a retirement kitty for you. Do not use up the emergency corpus in savings account. At best, invest them in debt mutual funds. For your children, start SIPs in simple index equity funds like Nifty, Nifty 500, and some 20-30% in corporate bond mutual funds.

(The adviser is Co-founder, Primeinvestor.in)

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