orried about your money, and what to do with it?

Investment expert Uma Shashikant answers all your investment-related questions.

I am 30. I have a wife and a three-and-a-half-year old son. I work with a private firm. I plan to start investing in mutual funds or any suitable investment. I have an insurance policy with LIC [Get Quote] (Rs 2,000 per annum premium). I have no investments in shares. I also don't have any money in schemes like NSC, PPF and MIS. I don't even have a provident fund account. How do I go about my future investments? Where can I invest my money?

- Ravi Thapliyal

It could be useful to view your investments like a careful portfolio that you will build over the years, working on it, component by component. To visualise the portfolio like a pyramid is a good choice. 

At the bottom of the pyramid are the absolute essential, safe options. Have some bank fixed deposits, open a PPF account (it is still the only choice with tax-free interest), buy some RBI relief bonds, invest some money in a post office deposit. 

You then build the next block of the pyramid, where you move into some amount of risk cover for yourself and the family, and accumulation of some assets. Make sure you have your income generating capability assessed, and have adequate insurance. Make some investments in property and gold. 

Move to the next block, where you are ready to look at mutual funds. Choose from the top performing, well managed fund houses with reputation. Allocate some money into balanced funds, and some into diversified equity funds. About 20% can be in specific aggressive funds. Build a portfolio of mutual funds, either by allocating money or through monthly investments in a Systematic Investment Plan. The top layer of your pyramid is for direct equity, derivatives and risky choices. Keep it minimal, and only after you have build a sturdy base. Draw this picture on a piece of paper, see what you will be able to allocate where. 

By the time you are 40, you should have a portfolio that is almost completely allocated. Then you only have to increase its size by adding to the components.

I am a 29-year old software engineer and about to get married. Last year, I had taken two life insurance policies with Prudential ICICI [Get Quote] and another with Birla. All are market-linked policies. Should I go for the long term or take back by money after three years? I have just a little investment in NSC and bonds. Is my investment a good decision? Should I take a policy with LIC as many people have?

H H

How much insurance you need is a function of how much risk you like to cover. At your age and the level of personal commitment, pure term policies would be the cheapest to buy. Money back is of limited use to you.

Begin to make some investments. Since age is on your side, you should consider equity. Over the long term, equity returns are better than fixed income schemes. Keep some in safe products as a buffer, and begin investing in equity. Mutual funds could be a good way to do this.

• Make money with shares
• What's in a share? Money!

I am 29 years old, married and working as a software professional. I usually invest in PPF, LIC and post office recurring deposits. Recently, I began investing in mutual funds via a systematic investment plan. Can you suggest another avenue where I can put some more money that is safe and also gives a good return. I am generally looking for an investment horizon of three to five years.

- Chaudhuri, Debasish

Investment choices have their own trade off. If you need safety, you may have to settle for lower returns. If you need good returns, you should be willing to take some risks. Given your age, and the fact that you will have a salary income for a long time, do you think you really need your investment to generate income? 

Should you worry about where the equity markets would go next month, if you need your savings only after 30 years? Think about it. If you are clear that you are looking at a large retirement nest egg for yourself, accumulated during your earning period to be of use when you retire, you should be willing to take long term, albeit risky, calls. If you are ready for it, there is a choice of funds to invest in, and reap the benefits.

What are the benefits of investing in a mutual fund? My investments as of now are only in NSC, ICICI tax saving bonds and other such investments.

- Sanjay  Agnihotri

Mutual funds are vehicles through which you make investments in various markets for money. There are a number of seekers of capital (money) in the market, such as government, corporates, institutions, banks and so on. They need capital for various uses, and are willing to pay interest/ or share their profits, for your investment. Mutual funds help you make these investments in a sensible manner. They identify and classify these choices for investing capital, and offer them to you as products. 

For example, a liquid fund will invest your money in short term borrowings of corporates and banks. An equity fund will invest in the capital of companies that show the potential for growing into profitable entities. There is a choice of products that help you take an exposure to many of these segments of the market. The risk in mutual funds is that what is in the market is your return. There is no assurance of return. You can know the value of your investment on an everyday basis, and you can withdraw your funds any day you like.

If you like the idea of deploying your funds to work for a market rate, managed by professionals, and available for your use any day you like, you should consider mutual funds.  

• Select the right mutual fund
• Understanding mutual funds

Uma's earlier pieces:
� Smart Investment Strategies
� The best ways to invest your money

Got a question for Uma? Please write to us!