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First Job at 4.5L CTC: What Investment Plan is Right for Me?

Ramalingam

Ramalingam Kalirajan  |7159 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 14, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Asked by Anonymous - Nov 05, 2024Hindi
Money

Hi Tejas Sir, My son recently joined an organization for which his CTC is 4.50L per annum, it is his first job. Kindly suggest me a good investment plan (long term). Thanks in advance.

Ans: Creating a long-term investment plan early in your son's career is a wise decision. This approach will build a solid financial base and help him achieve future goals comfortably. Here’s a detailed, 360-degree approach for his investment planning.

Step 1: Setting Financial Goals
It’s crucial to establish clear financial goals as these will shape his investment journey.

Short-term Goals: Building an emergency fund, funding small personal needs, or saving for specific items.

Long-term Goals: Potential goals may include buying a house, higher education, or retirement planning.

Clearly defining these goals can direct his savings and make his financial path smoother.

Step 2: Building an Emergency Fund
Why It's Essential:

An emergency fund provides security during unexpected situations.
This is his financial safety net, covering at least 3-6 months of expenses.
Where to Invest:

Consider liquid mutual funds or high-yield savings accounts for quick access.
Start with small contributions from his salary to build this fund gradually.
Goal Amount:

Based on his monthly expenses, calculate an amount equivalent to 3-6 months' spending.
Creating this fund is the first priority before moving to other investments.

Step 3: Starting with SIP in Equity Mutual Funds
Equity mutual funds can provide growth over the long term. It’s important to choose actively managed funds, not index funds, to maximise returns.

Benefits of Actively Managed Funds:

Actively managed funds allow fund managers to adjust to market changes and seek higher returns.
These funds are more flexible and responsive than index funds, which simply track the market.
Choosing the Right Fund Types:

Large-Cap Funds: These provide stability as they invest in top companies.
Flexi-Cap Funds: These offer flexibility by investing across market capitalisation for balanced growth.
Small-Cap Funds: Small-cap funds are higher risk but can generate strong returns over a longer period.
Starting with a SIP:

A SIP (Systematic Investment Plan) enables disciplined investing with a fixed amount monthly.
Beginning with even a small SIP amount and gradually increasing it will build a solid corpus over time.
Tax Implications:

When selling equity mutual funds, long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%.
Short-term capital gains (STCG) are taxed at 20%. It’s advisable to hold investments long-term for tax efficiency.
Step 4: Exploring Tax-Saving Investments
Since he is just starting, your son should make the best of tax-saving investment options.

Public Provident Fund (PPF):

PPF offers risk-free returns with tax benefits under Section 80C.
Although returns are moderate, the interest is tax-free, and the fund is secure.
Equity-Linked Savings Scheme (ELSS):

ELSS mutual funds provide tax savings under Section 80C and offer growth through equity exposure.
They come with a three-year lock-in, which encourages long-term savings.
National Pension System (NPS):

NPS is a retirement-focused, tax-saving instrument.
It offers additional tax benefits under Section 80CCD(1B), with Rs 50,000 extra deduction.
Combining Multiple Options:

Use PPF for stability and ELSS for growth, ensuring tax benefits.
For long-term planning, NPS can supplement retirement savings.
Step 5: Health and Term Insurance Coverage
Adequate insurance coverage is essential. It shields your son and the family from potential financial burdens due to health issues or unexpected events.

Health Insurance:

Having health insurance early can ensure low premiums and build a secure future.
Choose a comprehensive plan covering major medical expenses. Many organisations offer group health insurance, but a separate policy adds extra coverage.
Term Insurance:

Term insurance may not be a priority now as he has no dependents.
He can consider term insurance later, especially when he has financial dependents or specific liabilities.
Step 6: Gradual Wealth Creation through Systematic Investment
As he grows in his career and income increases, it’s wise to gradually increase his investments.

Increasing SIP Amount:

Regularly increase his SIP amount, aiming to maintain at least 15-20% of his income for investments.
This will maximise compounding benefits and boost his corpus over time.
Step-Up Investments:

With salary increments, allocate a portion to step-up his SIPs in equity mutual funds.
This disciplined approach will help reach larger goals faster.
Step 7: Avoid Direct Funds; Invest via Certified Financial Planners
Why Direct Funds May Not Be Ideal:

Direct funds may seem to save fees but lack professional guidance, which is crucial for new investors.
Investments through a Certified Financial Planner (CFP) ensure expert management, making his investment journey smoother and less risky.
Regular Funds Managed by MFDs:

Mutual fund distributors (MFDs) with CFP credentials can offer ongoing portfolio reviews and adjustments.
This ensures the portfolio is aligned with changing market dynamics and your son’s financial goals.
Step 8: Reviewing and Realigning Investments Periodically
Why Regular Reviews Are Important:

Periodic reviews ensure that the portfolio remains aligned with financial goals.
Market trends and personal goals may change, and reviews help adapt the investment approach.
Consulting a Certified Financial Planner:

A CFP can provide valuable insights and strategies, especially as income and responsibilities grow.
Regular consultations help optimise asset allocation, risk management, and tax efficiency.
Step 9: Building Financial Discipline
Budgeting and Saving Habit:

Encourage your son to set a monthly budget to understand his expenses and track savings.
Prioritising savings from the start helps create financial discipline.
Emergency Fund Maintenance:

Review the emergency fund periodically and ensure it covers any increase in living expenses.
Use only for genuine emergencies, preserving his financial stability.
Avoiding High-Interest Debt:

Discourage him from credit card debt or personal loans, as they can impact his financial health.
Opt for planned spending to prevent debt and maintain healthy credit.
Finally
Your son’s new journey into financial independence is the right time to instill good investment habits. Starting with SIPs in equity mutual funds, maintaining an emergency fund, and exploring tax-saving instruments will set a strong foundation. Encourage him to be consistent, disciplined, and consult a Certified Financial Planner regularly. These small steps today will significantly shape his financial future.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Financial Planner - Answered on May 31, 2023

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Sanjeev Sir, jai Hind. My self Sub Maj (Hony Capt) Retd A K Maan. DOB of My Son is 10 Mar 1999. Presently he is working with WIPRO as a software Engineer. Please suggest any best investment plus Insurance policy for my son. Thanking You Sir Regards Capt A K Maan (Retd)
Ans: Jai Hind Saheb
Before giving this answer, I assume the following:-
• He has some capacity to invest for his future financial goals.
• He is not married and has no liabilities for now.
• He has not done any investments so far and is starting afresh.
Whatever he has already done or is already doing can be discounted from what I have written below.

As a young person with no family responsibilities right now or coming up in near future, he should be doing the following:-
• He should have an emergency fund at the very outset, equal to 6-12 months’ worth of your expenses, to cater for unforeseen circumstances like a job loss or gap while transiting to another job. If he does not have it, create earliest through a lumpsum or slowly contributing to it, as convenient to him. It should be invested in small bank FDs or Liquid mutual funds from where he can take it out in a short period of time.
• Have a term insurance plan with a life cover equal to about 7 years of your annual income, in case he has any financial dependencies. If not, it is not required right now.
• Even if he has a medical insurance cover given by his employer, he should have his own cover too for about Rs 3-5 Lakhs to cater for employer provided cover not being there like while shifting a job or next employer not offering it .
• Subscribe to EPF to the extent of Rs 2.5 Lakh (own contribution) per year which is the maximum tax-free amount he can contribute to it.
• Depending on his risk profile (which should normally be high at his age), invest in SIPs (Systematic Investment Plan) of Equity Mutual Funds for his long-term goals occurring at least 5 years from now. In case he has any goals coming up withing 5 years, the investment should be done in a combination of FDs/RDs, debt funds and hybrid funds as per the amount available with him. Increase these SIPs as per his salary increase every year.
• His financial goals in future would pertain to his children, house, retirement, vacations, vehicle and many more as per his own perception and requirements. For retirement goal, NPS (National Pension Scheme) would also be a good way to go ahead with in the form of SIPs there.

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Ramalingam

Ramalingam Kalirajan  |7159 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 20, 2024

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hi sir : my son doing job since two year monthly earning is 60 K. but his saving is nil. pl. advice where to invest
Ans: It's great that your son has started earning, and it's essential to guide him on saving and investing for the future. Here's a step-by-step investment plan tailored for him:

Emergency Fund: Start by building an emergency fund equivalent to 3-6 months of expenses. This fund should be easily accessible, like a savings account or a liquid fund.
Debt Repayment: If he has any high-interest debts like credit card bills or personal loans, it's wise to clear those first to avoid paying hefty interest.
Investment Options:
Equity Mutual Funds: For long-term wealth creation, he can start SIPs in diversified equity funds. A mix of large-cap, mid-cap, and multi-cap funds can provide growth.
PPF (Public Provident Fund): A tax-efficient and safe option for long-term savings with a lock-in period of 15 years.
NPS (National Pension System): A retirement-focused investment with tax benefits, offering a mix of equity, corporate bonds, and government securities.
Term Insurance: Since he's working, consider getting a term insurance plan to ensure financial security for his dependents.
Health Insurance: A comprehensive health insurance plan to cover medical emergencies can provide financial security and tax benefits.
Budgeting and Savings: Encourage him to create a monthly budget to track expenses and identify areas to save. Automating investments through SIPs can also help in disciplined saving.
Financial Education: Educate him about the importance of financial planning, saving, and investing. Encourage him to read books or attend workshops on personal finance.
Starting early with disciplined saving and investing can help him build a substantial corpus over time. Encourage him to consult a financial advisor for personalized guidance tailored to his financial goals and risk tolerance.

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Ramalingam

Ramalingam Kalirajan  |7159 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 03, 2024

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Dear Sir, I find your suggestions very effective. This is for my son who is 31 years old and works as a Manager in a leading IT Company. His CTC is approx. Rs. 35 lakhs per annum . His wife is also working. At present they have no kids. We are a joint family and live in our own flat . He is having EMI of only Rs 13,000/- till 2025 December and want to invest about 50,000/- ( fifty thousand )per month in Mutual Fund for a long term period of 15-20 years. Can you kindly advice so that a good corpus is created by 20 years. At present they have some investment in Gold EFT & stocks. ( around 5 lakhs). Best Regards, UKM
Ans: Dear UKM,

Thank you for sharing details about your son’s financial situation. Your son’s proactive approach to investing is commendable. Creating a long-term investment strategy will help him build a substantial corpus over the next 15-20 years.

With a monthly investment of Rs 50,000, a disciplined approach will ensure he achieves his financial goals. Let’s explore the best way to allocate his investments in mutual funds for maximum growth and stability.

Evaluating Current Financial Position
Your son has a stable job with a CTC of Rs 35 lakhs per annum. His wife is also employed, and they have no children at present. They live in a joint family-owned flat, which reduces housing costs. The EMI of Rs 13,000 till December 2025 is manageable.

His current investments in Gold ETFs and stocks amount to Rs 5 lakhs. These provide some diversification and a good start.

Benefits of Mutual Fund Investments
Investing in mutual funds offers several advantages:

Professional Management: Fund managers use their expertise to select and manage a diversified portfolio.

Diversification: Mutual funds spread investments across various assets, reducing risk.

Liquidity: Mutual funds can be easily converted to cash.

Flexibility: Investors can choose from a wide range of funds to suit their risk appetite.

Disadvantages of Index Funds
Index funds track market indices and lack active management. They mirror the market’s performance, which can be limiting. Active fund managers strive to outperform the market, providing the potential for higher returns. This adaptability is particularly beneficial in volatile markets.

Benefits of Actively Managed Funds
Actively managed funds offer:

Expertise: Fund managers actively select and manage investments to outperform the market.

Risk Management: Active funds can adjust holdings based on market conditions, potentially reducing risk.

Higher Returns: With skilled management, actively managed funds often aim for superior returns.

Direct vs. Regular Mutual Funds
Direct mutual funds have lower expense ratios but require investor expertise. Regular mutual funds, managed through a Certified Financial Planner (CFP), provide professional guidance. The additional cost of regular funds is justified by the expertise and peace of mind they offer.

Creating a Balanced Portfolio
To build a robust corpus over 15-20 years, a balanced portfolio with equity and debt mutual funds is recommended. Equity funds offer growth potential, while debt funds provide stability and reduce overall risk.

Systematic Investment Plan (SIP)
A SIP in mutual funds helps in rupee cost averaging and disciplined investing. Investing Rs 50,000 per month through SIPs in diversified equity mutual funds can leverage the power of compounding.

Suggested Asset Allocation
Based on your son’s risk profile and investment horizon, the following allocation is advisable:

70% in Equity Mutual Funds: For growth potential over the long term.

30% in Debt Mutual Funds: For stability and risk mitigation.

Equity Mutual Funds
Equity mutual funds can be further diversified into:

Large-Cap Funds: Invest in well-established companies with stable returns.

Mid-Cap Funds: Offer higher growth potential but with increased volatility.

Small-Cap Funds: High growth potential with higher risk.

Sectoral/Thematic Funds: Focus on specific sectors or themes with potential for high returns.

Debt Mutual Funds
Debt mutual funds can be diversified into:

Short-Term Debt Funds: Provide liquidity and lower interest rate risk.

Corporate Bond Funds: Invest in high-rated corporate bonds for stable returns.

Government Bond Funds: Offer safety and moderate returns.

Monitoring and Rebalancing
Regular monitoring and rebalancing of the portfolio are crucial. This ensures the investments align with your son’s financial goals and risk tolerance. A CFP can provide valuable insights and make necessary adjustments.

Tax Planning
Mutual funds offer tax-efficient investment options. Equity funds held for more than one year qualify for long-term capital gains tax at 10% on gains exceeding Rs 1 lakh. Debt funds held for more than three years qualify for long-term capital gains tax at 20% with indexation benefits.

Emergency Fund
An emergency fund equivalent to six months’ expenses should be maintained. This ensures financial stability during unforeseen circumstances and prevents the need to liquidate long-term investments.

Insurance Coverage
Adequate life and health insurance coverage are essential. This protects against financial risks and ensures peace of mind.

Additional Considerations
Your son’s EMI will end in December 2025. Post-EMI, this amount can be redirected towards investments, increasing the monthly SIP amount. Regular increments in income can also be partially allocated to SIPs, accelerating corpus growth.

Summary of Action Plan
Invest Rs 50,000 per month in mutual funds via SIPs.

Allocate 70% to equity mutual funds for growth.

Allocate 30% to debt mutual funds for stability.

Regularly monitor and rebalance the portfolio with a CFP’s guidance.

Maintain an emergency fund for financial stability.

Ensure adequate insurance coverage.

By following this plan, your son can build a substantial corpus over 15-20 years, ensuring financial security and growth.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

..Read more

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Is doing BBA + Law (Honors) from BITS Law is worth
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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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