Investments – Ideas and Tips


How Much Money That You Need To Invest?

Investments in ELSS

Many of us may make some investments in ELSS (Equity Linked Saving Scheme) for saving tax this year. ELSS is a good investment, but do you have any idea how much amount that one need to invest to get the maximum advantage?

First of all, we need to decide whether to invest the maximum amount to avail the full tax benefits for the year. Many people just do that for the sake of saving some tax amount and they forget about the risks  associated with the equity-exposed investments such as Unit linked insurance plans (ULIP) and Equity linked saving schemes (ELSS). Yes, every investor should have sufficient amount of money exposed to few good performing equity linked investments to gain decent profit but that does not mean that we should invest all savings in equity products.

How much money one should we invest in equity savings and for how long?


As a thumb rule, it is not advisable to expose the whole savings to equity exposed investments. One need to keep a portion of it to meet future contingencies due to untoward incidents or any medical issues for self and family members. The amount one need to keep aside to meet these contingency risk factors may vary depending upon that individuals socioeconomic status. Your entire family may be covered under life insurance and health insurance but you still need to keep this contingency fund aside just to be on safer side.

Investments, Investible surplus and expenses calculation

Invest only a part of investible surplus and not all your savings. Investible surplus is the amount that you have after all your regular expenses – that include your family and personal expenses – are met. It is about deducting your 3-4 months average expenditures plus around 10% of annual savings. Let us make it clear with a simple example.

Consider your total annual savings are 400000 INR and your average monthly expenditures and contingency expenses are about 30000 rupees and 45000 rupees respectively.

Then your investible surplus would be around: 235000-265000 INR

400000-((30000*3) +45000) OR 400000-((30000*4) +45000))

If you know your regular investments, then it is easy to calculate your investible surplus by using the method mentioned above. This is an amount that we can ideally invest. However, it is still not advisable to go ahead and invest the whole money in ELSS or any other equity linked investments. Many people cannot afford to do so because products like ELSS or ULIP cannot be liquidated in first few years of its inception and it is subject to high market risk.


How Much Money That You Need To Invest?

In such situation, how to go about it? Just ask yourself, can you take that much risk? Many people cannot take such risk with their hard-earned money, especially if they are above 40 years and having too many financial commitments to self and family.

In such cases people would prefer investments in low risk asset classes even though such investment plans earns comparatively less return  than  high risk equity investments. The ideal solution would be to spread the whole investments into different asset classes. This way we can share the risk associated with the investments in equity products.

Managing Portfolio of Investments

Now, the question is how much percentage of your investments that we should expose to equity market every year?

There is a general thumb rule that shows the maximum percentage of investible surplus amount that one has to expose to equity products at any point of time in a year. There is no hard and fast rule that you should stick exactly to that rule but, ideally keep somewhere close to that. When you follow this rule, you will get better control on your portfolio and investment pattern. This will help you know where do you stand on the way to achieve your investment goal. This figure is calculated based on the age of an individual, so it is an approximate figure but the most ideal equity exposure of an individual can only be arrived through proper personal financial planning process with the help of a certified financial planner.

So What is this thumb rule for investments?

Minus your age from 100 and takes that much percentage of your investible surplus (Not full savings) of that year as the amount that we can invest in any tax saving equity-linked investment plan for that year.

Let us make it clear with the same example mentioned earlier. Here, our investible surplus amount is 235000 to 265000 INR. Let us assume your age is 30. That means you can expose up to 70% (100-30) of your investible surplus to any equity linked investments this year.

InvestmentsNow, if we take 70% of 235000 or 265000 INR (We can choose either one of these figure depending on  our personal preferences and risk appetite) we get the actual amount that we can ideally invest in this year. It comes to Rs.164500 to 185500.

Remember, this amount is subjected to change every year as you get older. This ratio varry based on investible surplus amount that we would have in the coming years. We need to adjust this level in each year and maintain the ratio between equity based investments to the other investment components. Maintain the percentage based on the age, overall portfolio value and the amount that you want to invest in each year.

We understand how much money that we need to invest in equity market every year.  Now, you may want to know how long one should invest in these equity linked instruments? Every ELSS has a minimum locking period of 3 years. Investors are free to exit this fund if they are happy with the return they earned after this locking period. In case the investors want to gain more return then they can wait for few more months or years for the fund to appreciate. 


Where To Invest?

Which are the top ELSS funds that we should prefer?

Almost all Asset Management Companies in India has an ELSS scheme. Investors need to go through the fact sheets of each mutual fund and analyze the previous years performances. Investors can make a decision based on this analysis. Here are three ELSS funds that performed well in the past years:

1. Franklin Templeton: Franklin Templeton Tax Shield

This is an open end equity linked savings scheme (ELSS) with an allocation of minimum 80% to equities to enable growth over the long term. Since this fund invest mostly in large cap blue chip companies, the investment made in this fund is subject to less volatile than mid cap funds. I suggest this fund in all market scenarios due less risky nature compared to its peers. 

2. SBI MF : SBI Magnum Taxgain Scheme

This is a very old fund but it has consistently performed at regular intervals in the past. You might not see this fund holding the top performer’s slot quite often but it will definitely give a decent return over 4-5 years of term.

3. TATA MF: TATA Tax Saving Fund

This fund is managed by the Fund manger, Pradeep Gokhale. One can invest Rs.500 or multiples of 500 in this scheme. This fund invest 80% to 100% in Equity & related instruments. The remaining part of this fund is allocated to listed and unlisted debt instruments. Since this fund is highly exposed to equity market, it is classified under high risk investment. This is a top ranking fund and performed consistently in the past.

Although there are many top performing ELSS schemes in the market right now, I am always in favor of these three funds because they have always shown stable growth over a period of 4-5 years. Investors can expect a decent growth from these ELSS funds. Always refer Mutual fund’s monthly fact sheet before making an investment in any mutual funds.

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Top Investment plan for beginners

Investment plan for beginnersWhat is investing?

Investing is the way one can grow their surplus money saved from earnings. By investing, investors make their money grow and appreciate for long term financial goals. Ideally speaking, investing is a way of saving your surplus money for the future.

How to get started with our investments?

First of all, we need to find out our investor profile. This will help us determine what kind of investment is suitable for us to meet our investment goal. We can relate our investments to a vehicle that we use to reach our destination within a given time. We normally choose our mode of transport based on few factors such as

  • The distance that we want to travel
  • How fast and comfortably we want to reach our destination
  • The kind of price that we are willing to pay for our travel etc.

Similar way, in investment we need to consider certain factors when we want to choose the type of investment for self and family. Mainly, there are four important factors that we need to consider and they are:

Duration: How many years do you want to invest or how long that you can hold on to your investment? This is called investment horizon and this investment horizon is broadly classified into three : Short term, medium term and long term. These three investment horizons are explained in detail in the coming paragraphs.

Returns: This depends on our investment goal. What return are we expecting from our investment? Are we looking for moderate return or high return? Remember, return on investment is always inversely related to the investment risk. So the investments made in high return instruments would always come with a price, risk!

Risk: There are different types of investments and they can be classified based on the risk involved as low risk, moderate risk and high risk investments. Investments made in debt instruments carry low risk and relatively safer than other type of investments. Equity investments are high risk in nature and volatile with the market movements. We need to consider our risk appetite while choosing our investment. Ideally, you ought to change attitude towards risk as you get aged.

Liquidity: Liquidity is an important factor in any investment. Many investment plans come with a compulsory locking period. Although such products offer better returns, we need to ensure that if we are prepared to hold on to such investments for certain period or not. We should decide to what extend we could expose our investments to such products.

Investment plan for beginnersWhy do people invest?

As mentioned above, people make investments to meet certain financial goals in life. One can have short-term financial goal, medium-term financial goal or long-term financial goal. Let us understand each one of them clearly now.

Short-term objectives: As its name implies, these investments come with a short-term objectives – varies from few weeks to 2years– and relatively for smaller amount. Investments with short-term objectives are generally for meeting short-term goals. For example, short-term investments for meeting domestic holiday trip expense or accumulating fund for buying something that we wanted to buy in the past but postponed for some reasons.

Medium-term objectives: Investments made for a duration of up to seven years is considered as medium-term investments. People make these investments to meet their mid-term objectives where relatively more money would need to be accumulated towards the end of the investment term. People opt for mid-term investments to meet expenses for buying relatively more expensive items.

For example: You can go for mid-term investments to accumulate fund for buying new vehicles, to meet expenses of overseas trip for pleasure, for meeting educational expenses or to keep fund for future contingency expenses for self and family members.

Long-term objectives: Investments made with these objectives are meant for longer period, usually more than 7 years. Insurance investments made in retirement funds or child protection plan are some of the most common long-term investments. Long term investments are less volatile in the market hence it is much safer than other type of investments.

Investments made in insurance policies would usually mature after 10 years or 20 years. People invest in long-term investments with a long-term objectives in mind such as investment for retirement, children’s education and marriage fund or just want to create wealth for their safe future.It would be ideal to keep some portion of long term investments in good performing mutual funds along with your existing insurance policies to balance ROI.

Investment Plan

We need to follow certain rule when are planning to invest. We should have combination of all type of investments so that we can balance our return irrespective of the market movements.

Goal Setting: This is the first and the most important steps in any investment. We ought to set our investment objective very clearly for each investment term and each investment should have its own goal and plan from the beginning. It is wise to exit from an investment when our planned objectives are met even before the deadline that we set for that investment. Our type of investments is largely depending on our investment goals.

Investment plan for beginnersRisk appetite: Fundamentally there are three types. High risk, balanced risk and low risk investments. Ideally, we should have all the three types of investments in our kitty so that we can balance our overall return that we make over a period. The ratio at which one needs to invest in these types of instruments would vary depends on each person’s risk appetite, age, investment term etc. Ideally one should have better equity exposure at younger age and slowly reduce that portion as that person getting aged over the years. As a thumb rule, we can find out the amount of equity exposure that you should have out of total investments with the following simple method.

Minus your age from 100 and ideally that should be your equity exposure out of your total investment. For example, a 30 year old person can keep 70 percentage of his/her total investment in to equity at the beginning and slowly reduce that part over the years. Review the investment once in 6 months or one year and balance the ratio periodically. However, there is no hard and fast rule that everyone should stick to this method as each individual’s risk profile is different.

Investment plan for beginnersWhat types of investments are available?

Equity: Large-cap, Mi-cap, Small-cap funds and ELSS are some of the most popular equity investments where equity portion ranges from 80% to 100%

Debt: Bonds, debentures, Certificates of Deposit, Government securities are some of the most common debt instruments in India. Out of this, G-Secs market holds a major portion of total market capitalization.

Balanced fund: Balanced fund are the combination of both Equity and Debt instruments. Most of the mutual fund investments do follow this principle for their investment. Balanced funds offer the benefit of both equity and debt and became the most preferred choice of average investors these days. Each Asset management company has different types of balanced funds introduced in the market.

Research about Investments: We should do enough home work before we venture in to any type of investments. Equity investment requires a lot of understanding from your side to get it right. Understand the basics of investment. Go through the portfolio composition and performance of each investment & compare our choice of investments with other identical investment plans in the market. Get investment advice from Authorized Financial Advisers, investment planners and other experts in the field, as and when required. Understand which sector is doing better in the market at the moment and choose your fund accordingly. It is a good idea to invest in cyclical and seasonal funds at some point of time during the year.

Spread investment risk: Never invest the entire money into one type of investment. Spread the risk across the different investment options available. Choose funds that invest in companies of different sectors. Balance your risk by investing some portion in low risk investment plans as well.


Read :Where Should we Put My Extra Money?

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