Posted by: Arti Bhargava on Mar 05, 2018, 06.30 AM IST
Tarun, a young architect, has just started working. He is ready to invest and is reading up on how to manage his investments well. He knows that starting early, investing regularly and for the long term are the key ‘rules of the game’. He has been getting a lot of advice and tips from family on where and how to invest. However, he wants to ensure that he invests the right way, keeping in mind his risk and return expectations.
Tarun should test waters before committing a large sum of money to any investment. Thus, he should invest small amounts in select products first to see how it works. He should track the returns, costs involved and the ease with which the investment can be terminated or funds generated, transactions conducted and information obtained. This will help him become comfortable with the product before he commits to a long-term investment plan.
Tarun should select a product that allows him to do three things. It must not necessitate a large commitment. It must allow him to make periodic investments rather than in a lump sum. It must allow him to withdraw or stop investment without cost or penalty. Not all products will allow Tarun to do all three.
For example, a PPF is a 15-year commitment. However, if Tarun seeks to invest in higher yield products, he has the option to invest just Rs 500 each month to keep the account going. Since the PPF is a low-risk product with tax-efficient returns, he may not lose by keeping the account going. On the other hand, a poorly selected Ulip may leave him with very few options and tie him to a high commitment.
As a first time investor, Tarun needs products that allow him the comfort of testing the flexibility without carrying out a major due diligence. Hence, ETFs are products Tarun might want to consider for his foray into equities. They give him exposure to equity markets without the need to either select stocks or evaluate a fund manager’s ability.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
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