Best way to invest
Quite often people are intimidated by the prohibitive costs of assets they desire, and give up their dreams. What they do not realize is that desires change over the years, and may be something better is in store for them. For whatever it is, they need to take the first step, which is start investing.
For starters, there are many small recurring deposit schemes offered by banks and other nationalized bodies such as post offices. By setting aside some amounts systematically, adequate amount can be saved over a period of 10 years. Ten years does seem a long time. But it is a beginning. Some mutual funds also offer similar systematic investment plans. A little bit of risk with a good mutual fund company with consistent track record is also worth taking.
There are two sets of people who can safely afford risks. One set refers to people, who are extremely rich, and therefore, they do not mind losing a bit of their money. The other set is going to the bankruptcy court anyways, and is therefore, giving it a last shot. Rest of the people would prefer to minimize risks. Therefore, the investment should also be divided into the bank or post office recurring deposit and mutual fund systematic investment plans.
Depending upon age, higher risks may be taken when one is in early twenties. This is the period when career is beginning, and any loss can be made up. Moreover, liabilities are also lower, as the person may not yet have started a family. At this time, 50 percent of monthly savings may be invested in mutual fund systematic investment plans, and the balance can go towards recurring deposits.
If, however, the earnings are good, and the person is a tax payee, then opting for home loans is better. Generally people back out from taking a home loan at this stage because they are on look out for homes that suit their needs, but are not in their budget. They forget that even homes can be sold at a later date, and therefore, the first home that they buy need not meet all their expectations. Buying such a home is still worth it because of tax concessions and the rentals it fetches. Rentals increase over a period, covering for proportionate inflation factor.
This first home can be sold at a later date, and consolidated into a larger and more modern home matching the tastes of the homebuyer. This is what the investor must remember.
Home loans offer a major advantage to the tax payee. Both interest and principal component forming the equated monthly installment are deductible from income for arriving at taxable income. In addition, the tax payee has to invest only about 10 to 20 percent of the cost of the home. The lender, who collects it through EMIs over a long tenure, finances the rest of the amount. Effectively, the amount paid by the homebuyer is much less because inflation reduces the value of these EMIs.
Buying a home enables the homebuyer to take a second mortgage at a later date, as home is a real estate and keeps on appreciating during the long tenure of the home loan. The borrower can utilize such funds for repayment of any other debts or even purchasing a buy to let properties.
For non-tax payees, the down payment (10 to 20 percent) of a home is ready in 8 to 10 years time from recurring deposits and mutual funds. This can then be used to buy a home. Such individuals should try to save some percentage of each salary increase during the 8 to 10 period. By doing so, they will have the benefit of compounding effect. Purchasing a home is a must because rentals increase annually, and the fixed income post-retirement cannot accommodate increasing rentals.
If possible a buy to let property may be bought. Otherwise, 1/3rd of monthly savings may be invested in stocks to cover for inflation. It does not mean that those who purchase buy to let property should not invest in stocks, or vice versa. These investments are meant to fetch higher returns that cover inflation. Risks associated with stocks are higher when compared to investment in buy to let properties.
From the balance 2/3ds, half should be used to meet home loan EMIs, and the balance should be invested in government bonds and securities, which fetch monthly returns and carry little or no risk. Over a period attempt should be made to ensure that this component covers all monthly requirements including the medical and life insurances.
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