Q. I am a government employee drawing over ₹50,000 in gross salary. I need suggestions on investing up to ₹10,000 a month with some tax-saving benefits
A. Before starting out on other investments, it may be good for you to build an emergency fund equal to about month’s worth of family expenses. This can be done through savings in a bank fixed deposit or post office deposit. This will be useful to handle emergencies you haven’t budgeted for. If you have dependent family members, get a pure term insurance policy to take care of them in your absence. Contributions to life insurance plans are eligible for tax exemptions under Sec. 80C of the Income Tax Act that allows you to claim tax exemptions on investments of up to ₹1.5 lakh made in select avenues during the financial year. Get health insurance if medical expenses are not covered by your job.
Having made these investments, you can actively look at other options to grow your savings. Where you invest will depend on two things — when you need the money and if you are willing to risk capital losses for higher returns. If you need the money within 3 years, post office fixed deposits are a good option. For 5 years, National Savings Certificates offer good rates with section 80C benefits on the investment. If your holding period is longer, you can consider the Public Provident Fund — a 15-year scheme with tax benefits both on the investment and the annual interest credited to your account. Both principal and interest are guaranteed in these options.
If you are willing to risk your capital for a higher return in the long run, you can consider starting systematic investment plan (SIPs)in one or two equity linked savings schemes. These are equity mutual funds that invest in the stock market, carry a 3-year lock-in period and are also eligible for Sec. 80C benefits on the initial investment.
Q. I am planning to invest in the share market. How can I a analyse a firm?
A. Having some allocation to the stock market can be good in the long run, as returns from shares usually beat inflation. But the return is quite highly dependent on the prices at which you buy them and the period for which you are willing to hang on to them as stock prices go through a roller-coaster. Today, you may be aware that the Nifty50 and Sensex30 are at all-time highs never seen before. The valuation ratios or prices that investors are willing to pay for every rupee of profit are at an all-time high too. This makes it risky for first-time investors to make a beginning in stock market investing. Investors buying shares now will need to be prepared for the prices of the stocks they own falling quite sharply (even 40-50% going by previous crashes) and staying there for an extended period.
However, your ability to earn good returns from stocks depends on your willingness to stay the course through such bear markets in order to capitalise on future increases.
If you are still keen to buy shares, you can start by investing in index mutual funds that own a basket of stocks making up indices like the Nifty50 or Sensex30 to get a real-life feel of market volatility. Usually, it is difficult for ordinary investors to earn better returns than the indices in the long run unless they are experts at analysing companies and good at timing the markets.
If you would still like to pursue stock market investing as a passion, start by reading books written by investing stalwarts both from India and abroad. How to invest right and prosper by A.K. Narayan, Stocks to Riches and Value Investing by Parag Parikh, Beating the Street and One Up on Wall Street by Peter Lynch, the annual newsletters by Warren Buffett at Berkshire Hathaway are some useful ones.
There are also many blogs and online forums – Fundoo Professor, Valuepickr and Dr. Vijay Malik’s blog are some that come to mind. Get into the habit of reading company annual reports and business papers and media to keep track of corporate events. Attend investor awareness webinars held by SEBI. Take your first steps into shares very carefully, by allocating a very small portion of your savings to a stock that you have done thorough homework on.
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