Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers.

I am a 23-year old bachelor working as software engineer. 

My monthly take home is Rs 35,000. Out of this, I have to give Rs 25,000 to my parents (I live with them).

How do you suggest I save?

 - Pankaj Dhingra

Hi Pankaj.

I suggest you focus on what you want to achieve by saving this money. Your reply might be -- buy a house, have a nice vacation or it could be simply nothing.

Let's say you want to create funds for a downpayment to buy your own house. The questions you will have to answer are:

1. How much do you think you will need for it?

2. When will you be needing the money?

If you invest Rs 10,000 every month and your investment generates a 10% return, you will have close to Rs 7,75,000 at the end of five years.

It might be useful for you to initially invest predominantly in low-risk investments like floating rate income funds. These are mutual funds that invest in floating rate instruments as against fixed rate instruments. The Grindlays Floating Rate Fund is a prime example. You should also put some money in a diversified equity mutual fund like the HDFC [Get Quote] Equity Fund.

After a couple of years of investing experience, you could consider inverting the ratio. Put the bulk in a diversified equity fund and the balance in a floating rate fund.

Or, let's say you want to save up for a vacation.

Then you will need a shorter time horizon and therefore you should invest more in debt (fixed return investments) as against equity (shares).

On the other hand, a vacation trip is more amiable to higher risk investment, so you could use more equity!

So, if I were in your place, I would do 20% of my savings in equity for the first six months and then increase it by 20% every six months. In effect, after two and a half years, I would be investing fully in equity.

What if you want to save for 'simply nothing?'

You may want to consider not saving at all.

Jokes aside, if you do not have a reason to save, you would not be asking where to save. Those who say they want to save to just have more money really need to pursue that thought further, hopefully with their near and dear ones, and identify goals worthy of pursuit.

Nothing charges up everyone more than goals that stir imagination and touch all involved.

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I am a 27-year-old bachelor, earn about Rs 50,000 every month and plan to get married this year.

I have three life insurance policies for which I have to pay an annual premium of Rs 37, 500.

I also have a PPF account in which I deposit Rs 12,000 every year.

How must I invest for the future and save for emergencies too?

- Anurag Karnawat

Firstly, let me raise a flag about investing through insurance policies. Very often, insurance policies bundle in investment products as well. The more obvious ones are called unit linked insurance policies.

However, I put any insurance product that promises to give you money even if you survive the policy into this category.

Let's for a moment classify them as insurance investment products.

Such products typically have fairly high entry loads. These are percentages of your total investment that are paid as fees and expenses to the company. This could 15% to 40% or even more. They are quite difficult to evaluate by lay people and often the most 'flexible' plans offer less flexibility than what other alternatives may make possible.

I believe it is often worthwhile to do two things:

1. Stick to doing what you understand

2. Buy advice from a non-sales person (the ones who do not get a commission on selling you certain products)

You haven't mentioned how much you can save every month. Let's assume you can invest Rs 25,000 every month. In that case, there is no reason not to make the most of the Rs 70,000 limit of the Public Provident Fund. Why do you put in just Rs 12,000 per annum?

Over and above this, you would do well to invest in equity for the purpose of saving for your retirement. A few suggestions would be:

1. Consider a mutual fund

For most of us, including myself, it makes tremendous sense to pay an investment manager to invest in stocks on our behalf. Mutual funds are a good investment vehicle that allows us to invest in stocks with small investment amounts.

2. Choose plain diversified equity funds

Avoid balanced funds which invest in equity (shares) and debt (fixed return investments).

Also, the risk is much less than a sector fund.

Avoid dynamic funds which give the choice to the fund manager of when to invest where (in various market caps � small-cap stocks, mid-cap stocks, large-cap stocks). But, if you are willing to increase the potential returns and take a higher risk, try specific mid or small cap funds.

Hope that helps.

Illustration: Dominic Xavier

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