Personal Finance Advise for Defence Personnel

“I Don’t Need any Hassle”

• “I don’t like high finance at all and have never really understood it. That apart, I don’t really save much; I’m actually a spender,” You can almost hear a large number of people saying so, who represent a large class of novice and possibly disinterested investors. Financial planners warn against such investment habits. They feel that using the fact that you don’t understand a product as an excuse to run away from investing usually proves harmful in the long run.
• Take the auto-debit facility. If you don’t want to write out cheques, opt for an auto-debit scheme with your bank, where money automatically flows out of your account towards insurance, deposits, mutual funds and other payments, every month without you having to intervene or ‘bother’. You can also opt for a sweeper account in which every time a fixed amount collects after payments are made and a predetermined balance is maintained, it goes into a fixed deposit. This helps reduce idle cash balance and create a corpus to invest later.
• Maximise your EPF/PPF/DSOPF. For such people, EPF/PPF/DSOPF is a great investment avenue which gives post-tax returns of 11.4 per cent.
• Equity exposure via ETFs. You will need equity exposure to beat inflation. Over the long term, equities have managed to do this consistently. You can make a no-fuss investment in exchange traded funds (ETFs), which invest in the stocks comprising the index in the same proportion in which they appear in the index. They have lower charges and low tracking error.
• Approach a financial planner. If all this is still too complicated for you, see a financial planner and outline your goals and needs. Once an acceptable strategy has been developed, stick to it.

“Risks Aren’t My Style”

Many savers get off the first base and save but are risk-averse and only look at ‘safe’ investment options that they can understand. These are usually individuals who believe that dealing in shares is for stock exchange sharks. If you are in this category, your portfolio should equally combine moderate risk and habitual returns. Here, identifying risks is important. The risks could be market-related, which people normally think of, or others such as inflation risk (that inflation eats into the returns of fixed-income options like fixed deposits and bonds), credit risk or risk of default (that a bank or any other financial institution will default on repayment), mortality risk (that you outlive your money), taxation risk (that taxes will whittle down the returns), and liquidity risk (that you will not have enough cash when you need it the most). On all the risks mentioned above, equity has been a better performer than debt, over a long term.

• Get high cover on low premiums through a term plan. To insure your life, take a term plan as early as possible, with the lowest possible premium and maximum possible cover. This will free up savings which can then be invested in higher-return options.
• Go for ETFs for low-risk stock investments. Educate yourself with verifiable facts that will dispel myths about the safety of fixed deposits and the risk involved in stock investing. Fixed deposits get hit by inflation and credit risk. Investing in an ETF is a low-cost, low-fuss way of saving for growth. They not only do away with taxation risk as long-term capital gains are tax-free, statistics show index investing also gives inflation-plus returns in the long term.
• Minimise taxes in the short term via FMPs. In the short term, invest in fixed maturity plans (FMPs) to protect against taxation risk and get higher returns in the debt segment.
• Maximise your EPF/PPF/DSOPF. For such people, EPF/PPF/DSOPF is a great investment avenue which gives post-tax returns of 11 per cent plus.
• Liquidity through floater funds. If it is liquidity you want, go for short-term floating rate mutual funds, which offer high safety levels, decent returns and are easily convertible into liquid money.

“Where do I Invest Next?”

• Over-investing is as bad as under-investing. Some people are ready to put their last available paisa into any option that sounds promising. They think that taking enough risks now will translate into higher savings in the future. The goal should be to have enough to meet one’s present and future needs. Beyond that, it is a calculated gamble which may or may not pay off. Here are some investment strategies for compulsive investors.
• Create contingency funds. Do not invest to the point that you have to go looking for high-cost personal loans during emergencies, as their high interest rates can more than offset your returns.
• Increase risk step by step. Go up the risk ladder progressively. As your income and savings go up, your risk-taking ability will also go up. Long-term returns from higher-risk options are higher. So, even though you may begin with a low-risk EPF/PPF/DSOPF or an ETF, you can move on to higher-risk options like top performing diversified equity or mid-cap funds, and then go on to stocks. Don’t skew your portfolio towards asset classes which are currently undergoing ‘booms’ or ‘bubbles’, such as residential real estate now.
• Reinvest returns for more benefits. If you don’t need the funds presently, reinvest your returns. This way, your effective returns increase while the principal remains intact. For example, returns from a post office monthly income scheme (POMIS) reinvested into a recurring deposit or better still, an equity fund systematic investment plan (SIP). The same goes for growth and dividend reinvestment options of a mutual fund scheme.
• Minimise tax outgo. Choose tax-efficient options. Go for capital gains over interest income, as there is no tax on long-term capital gains. These are better than dividend options as well because no dividend pay out means more is retained, which in turn means more savings.
• Be goal-oriented. Don’t be swayed by too many ‘experts’. Aim to save for specific needs, and not for an all-purpose corpus