Let’s move on and discuss the “Where?”

Where to Invest my first Rs.1000?

People used to tell us to invest our money in various assets like real estate, gold, ULIPs, money-back & insurance policies, cryptos, equity (shares and mutual funds), fixed income, etc. And they used to defend their point with an English Proverb, “don’t put all your eggs in one basket” which is complete bullshit, and they do investments in all assets because of the FOMO effect (fear of missing out) and thinking that they’re balanced in their investing.

If you invest in all asset classes which I mentioned above, then the percentage of your total return will be less than our inflation level(6 to 7%). Here, I am going to paraphrase the above point from the words below which I got from the book, Rich Dad, Poor Dad by Robert T. Kiyosaki.

If you have a little money and you want to be rich then you should be focused on your investments, not balanced. If you look at any successful investors, at the start they were not balanced. If you want to be rich, you must focus.

Do not do what poor and middle-class people do, like putting their few eggs in many baskets. Instead let me put you this way, “put a lot of your eggs in a few baskets and FOCUS”.

WHERE?

With the above phrase I put it simply, I would say invest only in two asset classes and they are: “Equity and Fixed Income” and it is more than enough to achieve your financial goals in life.

You are clear on where to invest, and you will have a question now “how much” percent of your investments should be in each asset.

Usually, we can arrive at the equity investment percentage for a person by subtracting his/her age by 100. E.g.: For a person of age 30,

Equity Percentage = 100 – Age (30) = 70%, so the remaining 30% goes for fixed income. (Refer to the table below for a clear idea). If you are 30 and you can invest 1000 INR every month then invest 700 in equity (70%) and Rs.300 in fixed income (rest 30%), that’s it.

This is just an example do your own math based on your investment capital.

Choosing the right instruments

Again, within equity and fixed income, there are multiple instruments available for investments which one I must choose in them?

01. Equity – Index Fund

Choose an index fund for equity. It’s a no-brainer, the index fund copies the companies from indices like Nifty and Sensex which have only the top blue-chip companies from India. When India’s economy develops, these blue-chip companies also will – which in turn reflects in their share value, so you don’t have to do any analysis about the companies or worry about whether the fund manager will perform well or not, and more than that you can sleep peacefully.

An index fund has a low expense ratio (< 0.5%) than any other active fund, which means you are giving your money to an AMC (Asset Management Company) to invest in their index fund (Nifty or Sensex) for that you’ve to pay the AMC for managing your money that is called expense ratio which will be less than 2% of your investment per annum.

The below snap shows the return of the Sensex index for the last 40 years, when you look at 30 years period (that means if you were stayed invested for 30 years) the returns are between 13 to 18% (which was a stellar return) and when you look at 15-year period there are no -ve returns. This is the reason I said Equity is enough to beat all your financial goals in life if you’ve consistency and patience.

I am using UTI Nifty 50 index fund for my investments via the ET Money app. UTI Nifty 50 has a low tracking error, and the current expense ratio is 0.28% which is low when compared to active funds.

02. Fixed Income – PPF/EPF

Coming to Fixed income, it is a straightforward one – use your EPF account as a fixed instrument. If you’re a permanent employee, then you must have an EPF account if not open a PPF in the bank in which you already have an account.

PPF and EPF are not volatile as equity they give steady returns every year. Unlike RBI bonds or debt mutual funds, the returns from PPF (7.1%) and EPF (8.1%) are tax-free returns and in this way, we can safely beat inflation or travel in line during rising inflation times.

You don’t need to go for any RBI bonds or Debt mutual funds for fixed income until you max out PPF which is Rs.1,50,000 maximum/year and in EPF until you feel a maximum of 12% base salary/year is not enough.

Note: PPF has a lock-in period of 15 years, and you can make a partial withdrawal only after 5 years and you can invest even a minimum of Rs. 500.

Why do we need a fixed income in our portfolio though we are getting maximum returns from equity itself?

As I shared in my previous post, the equity market is volatile there will be years of negative returns in equity (checkout the above Sensex returns snap once again) and if you need money during any negative return times you can’t take money from your equity portfolio which will be already in red (-ve). To tackle this, we need a fixed income in our portfolio, we can take money from PPF/EPF and use it. (Hoping you’ve completed your 5 years in PPF to initiate withdrawal).

I hope this post will help you to know a little about asset allocation and to choose the right assets for your first investment . 

Take care,
Peranesh xx

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