Here’s some
of the personal financial planning wisdom that I have gathered over the years
put into bullet points
- Spend what you have left after saving, not the other way around
- Save at least 10% of your paycheck, go as high as 30% if your income allows it
- Start saving as early as possible, preferably from the first paycheck
- Create a contingency fund, equivalent to at least 6 months expenses, put this in a liquid mutual fund
- Get life insurance (at least 5-10 times your annual salary, it won’t look that high 10 years down the road)
- Get medical insurance (go for at least 10 lakh limit)
- Don’t keep any high interest loans (credit card loan is an absolute no, repay car/bike loans as soon as possible)
- Home loan is okay if it is for your first home (taking loan for second home is like investing, there are other simpler ways to investment, see below)
- After all of the above, if you have extra savings, create a long term portfolio
- You should not touch this for at least 5 years, and preferably 10-15 years
- Go for direct mutual funds, open-ended with growth option
- There are many online providers which allow you to invest in direct mutual funds at no cost
- Mfuonline.com is a no frills option to invest in direct mutual funds
- Kuvera.com is another good option to invest in direct mutual funds at no cost
- Plan asset allocation, put (110-age)% into equity and rest into debt (e.g. if your age is 40, put 70% in equity and 30% in debt)
- For debt investment, choose 3 debt mutual funds (e.g. short term, medium term, dynamic bond)
- For equity investment, choose 5 equity mutual funds (e.g. index, large cap, mid-cap, value, balanced)
- Create monthly SIPs to keep adding to the chosen funds
- Review and rebalance your portfolio at least twice every year
- When redeeming funds, avoid exit load (typically 1 year for equity and some debt funds, 0 for liquid funds)
- When redeeming funds, pay attention to capital gains, try to avoid short term capital gain
- Gains in a debt fund kept for longer than 3 years, become long term capital gain, which can be index-adjusted, and effectively become zero in most cases
- Gains in an equity fund kept for longer than 1 year become long term capital gain, and are taxed at flat 10%
- If you need professional help, get an advisor to pick funds for you and periodically review your portfolio
- Make sure advisor does not work on commissions, rather a transparent upfront fee
- Remember, if your mutual fund name does not include the word "direct", someone is getting a commission out of it
- You can also allocate 5-10% of your portfolio to gold, you can go for sovereign gold bonds, or gold ETFs
- ETF is a good low cost option for investing into equity indices also (e.g. NIFTY)
- For ETF investing, open a low fee brokerage account (e.g. zerodha, upstox)
- For any short term goals (less than 4-5 years), create a separate debt fund and invest in it regularly to avoid disturbing your overall portfolio
- Never buy ULIPS or LIC or guaranteed return policies, most often their return is lower than even fixed deposits
- Maximize your tax savings by contributing 50000 in NPS and 1.5 lakh in EPF+PPF combined
- There is not much point in buying ELSS either, they are closed-ended, better to buy open-ended mutual funds, and use PPF for tax savings
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