I get many mails asking for advice on investments. Many want views on specific stocks which I avoid in the absence of any professional relationship. Many write in with requests that apparently fall in the realm of financial planning—specific goals that need to be achieved with certain sums of money. Let me give you one example:
“I am 24, working in XY Bank and earning Rs21,000/- monthly. Please advise me the best option to earn maximum returns in the next 2-3 years, with tax benefits, considering that I need around Rs10 lakh for my sister’s marriage after 2 years. I will get different loans (staff) up to Rs3 lakh-Rs4 lakh after 2 years. Also, suggest for my future savings. Will buying a term insurance policy for myself, after my sister’s marriage, be a good decision? Advise the best insurance company which will give maximum returns.”
Obviously, this person does not need a financial planner; he needs a miracle. His two years’ total salary would be under Rs5 lakh and he wants to generate Rs10 lakh in two years, OUT OF HIS SAVINGS, presumably. He wants the full works: maximum returns, tax-free and returns that perhaps only a casino would give!
People try and fit a financial plan to their wants rather than fitting a plan to what they have or can save or invest. It is nice to put down one’s goals that look like a laundry list—car, house, marriage, children’s education, children’s marriage and insurance etc, etc. Once we can understand that clearly defined, time-bound returns can only be had from fixed-income products (bank deposits, company fixed deposits, bonds, etc), we will be able to temper our expectations. It is not wrong to have ambitions. It is wrong to have ambitious expectations from investments.
Try and fit in your goals to realistic levels. In case it is not possible, the obvious solution is to find new employment or a new source of money. Savings and investment are built over time and not everyone is lucky to buy a stock that multiplies 10-20 times in three to five years. There are many uncertainties, once you want a return that is higher than what typical fixed-income products offer. To give an example, if I have a very definite need of a specific sum at a point in time, stocks may not help me meet the goal. It is best to invest in stocks with money one can spare for long periods of time (say 10 years or more). So, before you buy stocks, pause for a moment.
Typically, all of us want to protect ourselves first. Regular saving has to become a habit right from your first salary. Often, in our first few years, we tend to spend more than we should. All it calls for is to forgo some small pleasures early in life to have a secure life later. For instance, if you can divert even Rs5,000 every month into a good equity diversified mutual fund scheme, it can prove to be a great investment. Invest for the first 10-15 years of your working career (when perhaps there is less pressure on your salary) and that can actually give you a solid base when you retire. Think of this sum as something you spent rather than looking at it as money put aside to buy a car at the end of five years.
Naturally, you will have your provident fund and other savings which go towards making your future secure. After this, buy stocks or whatever catches your fancy. Yes, of course, I would urge everyone to take a term policy for a reasonable sum at an early age, to lock in lower premiums. You can discontinue this, once you feel that your family can manage financially with what you have accumulated.
Often, the mistake most of us make is to start our savings plan very late in life, when we are saddled with responsibilities. At this juncture, reason deserts us and we end up getting suckered into impossible dreams, peddled by financial intermediaries.