Invest Every Month
The benefits of investing every month in a systematic way are many. It makes you more disciplined, it helps you take advantage of market volatility, it is a lesser burden on the pocket, etc. The most common amount that a middle class person wants to invest now days is Rs 5000 per month. This is a very good amount to start investing and in this blog we will look at a plan which will give you risk coverage and also help you create wealth.
Factors To Consider
- Existing investments
- Earning members of the family
If your spouse is earning or if you have some income in the form of rentals, interest, etc then your family has some financial security. In case, you are the only earning member, then your family has no financial security. Even if you have few existing investments, your family will have to sell those to meet their daily expenses. So, our target is to cover your family’s financial security as well as create long term wealth.
Products To Invest
We will recommend two products – Term Insurance and Mutual Fund. By investing Rs 5000 per month, you can very well afford these two products. A term cover will cost you between Rs 700 per month to Rs 1200 per month. The balance amount can be invested as an SIP in good mutual fund schemes.
Sample Plan for Rs 5000 per month investment
By showing you a sample plan, we will try to convey how Term Insurance plus SIP in Mutual Funds can work wonders.
Mr Chintamani, age 25, wants to invest Rs 5000 per month. His advisors suggests that Chintamani should invest Rs 4250 in a good equity scheme and the balance Rs 750 per month should go towards a term insurance cover. He buys a Rs 80 Lakhs term cover for Rs 9,000 per year. Now, he has an SIP of Rs 4250 per month and a term insurance of Rs 80 Lakhs. There are two cases to consider:
a. He dies before the age of 60
b. He lives beyond the age of 60
A. He dies before the age of 60
The below chart shows how much his family will receive at the time of his death. The family will straight away get Rs 80 Lakhs from the life insurance company. Moreover, the SIP of Rs 4250 per month would have also grown by then.
You can notice that the family would get a decent amount which they can put in a FD and get a good interest income to meet their monthly expenses.
B. He lives beyond the age of 60
The amount he paid as premium for 35 years [Rs 9,000 x 35 years = Rs 3,15,000] is now worth nothing. But the SIP of Rs 4250 will have grown to ~ Rs 6.3 Crores by now! (assuming a 15% p.a. CAGR). He can retire in peace with this corpus. However, as his salary / income grew over the years, he must have made other investments (other SIPs, real estate, gold, FDs, etc) as well. He can meet other life goals from those investments without hurting his liquidity.
If you retire and have your own house, but have no liquidity (funds lying in your account), then how will you meet your monthly expenses? Indians are very well living beyond 80 years of age. Thus, liquidity during retirement years is crucial.
Best Term Insurance Plan
LIC’s term plans are nearly double in premium when compared to those of private players but has a higher claim settlement ratio too. You can opt for ICICI Pru Life, HDFC Standard Life or SBI Life. These insurance companies have maintained a decent claim settlement ratio. Ideally, your term insurance should cover you till 60. By then, your kids would have grown into adults and your investments would have grown into a respectable corpus for your retirement.
However, most of the insurance agents would try to pitch ULIPs and endowment plans. These products give them the maximum commission and the life cover in these products is just 10 times to 20 times of the annual premium. The life cover on a ULIP which has a premium of Rs 60,000 per year (Rs 5000 per month) would be between Rs 6 Lakhs to Rs 12 Lakhs. This is not a sufficient insurance coverage.
Best Mutual Fund Scheme
Your first SIP should ideally be for your retirement as that goal is the farthest away. Such a long period gives you a lot of scope to harness the compounding power of equity. You can choose from any consistent performing largecap, midcap or smallcap fund. Midcap and Smallcap funds have higher volatility and not every investor can face such volatility. There is no single best fund which we can talk. Ideally, your portfolio might need reshuffling every 3-5 years. Don’t try to change funds every 6 months or 1 year.
A good split would be:
Large Cap fund: 50%
Mid Cap fund: 30%
Small Cap fund: 20%
It is strongly advisable to get a good advisor who can not only guide you with the funds selection but also will keep your nerves calm when the markets get volatile or fall sharply.
ELSS Scheme or Non – ELSS?
ELSS schemes of mutual funds have a 3 year lock-in and offer deduction u/s 80C of The Income Tax Act. If you fall in the taxable bracket, it is wise to invest in ELSS schemes and claim the tax benefits. As the goal is long term, a 3 year lock-in would not be a problem. Both the insurance premium and ELSS scheme investment would qualify for tax benefits u/s 80C.
In this way you can invest Rs 5000 per month and cover your tax saving, retirement planning and family’s financial security goal.
Raghav Behani’s 49 page book – First Steps of Investing is live on Amazon.
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