Wednesday, April 22, 2015

The Way You Travel Can Decide The Way You Invest Too

Deciding Where to Travel (Deciding where to invest): Think of how you travelled in school or college trips. Full of energy and excitement, you would pack up in buses, huddle up in dormitories and wouldn’t mind going for a few adventurous treks also.

As you got married, had kids, your travel preferences changed towards more family-friendly, or may be luxury holidays at times.

The way you travel can decide the way you invest your money too. Early on in life, take risk of investing in equities and as you age, diversify your investments across other asset classes like gold, real estate, fixed deposits and bonds.

Stage 1
Single and Ready to Explore (Adventures of Equity Investing): A river rafting or a jungle camping is more adventurous and fun with friends. You are willing to take risks of going on trekking, river rafting and other excursions. Years later, these trips become lifetime memories.

So why not show the same adventure with your money? The sooner you invest in equities or shares in early earning life-stage, more the wealth you are going to create for your lifetime. Equities are risky but long-term wealth that you create will be just like those memories of the adventure trips in college. It’s also the only investment avenue that gives returns surpassing inflation over the years.

Equity investing, just like adventure trips, can be done in different ways. You can buy shares directly through a demat account or buy unit linked insurance plans (ULIPs) or units of an equity mutual fund.

The Risk of Adventures (Equity): You run the risk of losing a limb or getting severe injuries in adventure trips. But you avoid it by being cautious and alert.

In equity investing, share prices move up and down sharply. You overcome these risks by staying invested for a considerably long time, let’s say at least 5 years. Invest only that amount of savings that you won’t need for at least next 5 years.

Not understanding the tax implications is another big risk. There is no tax-exemption for investing directly in shares but investments made into certain kind units of mutual funds (equity linked schemes) and insurance plans are subject to income tax deduction under section 80C.

There is a tax on buying and selling of shares or funds within a specified time. Your gains will be taxed along with your taxable income if you sell them within 12 months of purchase date. Selling after 12 months will attract long-term capital gains tax of 10%. In case of unit linked plans, you don’t pay any tax if you surrender a policy after paying premium for 5 years.

Stage 2 
Just Married, Ready to Spend and Explore (Invest More): As you get married, exotic foreign vacations typically replace the adventure trips. You boast about those holidays in office meetings or parties, explore new destinations, new cuisines and so on.

When it comes to your investments, you increase exposure to equity as your income grows and your financial goals change. As aspirations of owning a house, owning a car or exclusive jewellery grow, you buy a house or invest in gold as an asset class.

The Risk of Exploring (Diversifying Portfolio): The risk while going for an exotic foreign vacation is possibly of an empty bank balance due to over-spending. This is a risk that can be avoided if you remain prudent.

Avoid risk-investments through a diversified portfolio of shares (or linked instruments), gold, real estate, fixed return instruments like PPF or fixed deposits. You may understand one particular asset class, let’s say gold, but putting all your savings in gold is like traveling to the same destination all over again.

Stage 3 
A Complete Family with Kids (A complete investment portfolio): When you have kids, your travel plans become more organized and planned. You look at the child-friendly aspects of a destination. You always carry a medical emergency kit and baby food with yourself.

For your investments, the purpose now is to grow and preserve the wealth. Invest your additional income towards creating an emergency fund, in avenues that give steady returns like public provident fund (PPF) or post office savings, non-convertible debentures, and even pension products.

Non convertible debentures (NCD) offer better interest rates than fixed deposits but their tenure can be much longer and you cannot just redeem them before maturity until it’s actively traded on a stock exchange.

PPF, post office savings or fixed deposits, offer steady returns as well and help in creating a savings pool for a long-term.

Pension plans offered by insurance companies or mutual funds help you create a savings pool and regular income source for retirement.

The Risk to a Complete Family (risks to a diversified portfolio): An emergency kit is what you always keep when you travel with kids.

What do you do to protect your assets like house, car, and your life? Keep adequate protection through insurance cover. An unforeseen event in your life, to your health or to your house can force you to dip into your diversified portfolio.

Stage 4
Becoming a Retiree Couple (Making a leaner portfolio): In this stage, people usually visit pilgrimages or familiar destination for holidays. It’s also the time of the life when you don’t really want to be adventurous with your money. 

Redeem equity investments for marriage, higher education of children or even for your retirement. Seek out for steady return-generating assets such as rental income from house property, invest in retirement benefits in senior citizen savings scheme or annuity schemes of insurance companies.

This rule may not apply to everyone. Just like all retirees don’t seek pilgrimage. It is a stage when some of us are done with our family responsibilities and we want to enjoy the wealth created. So we may visit new destinations may be in groups.

In our investments, we may continue to invest in shares on our own too.

The Risks to Retirement (Risk to Investment Portfolio): You may fall sick on a foreign holiday or get hurt on a pilgrimage. To prevent this, you carry enough medication and get travel insurance for yourself.

The danger to your retirement portfolio is not having enough corpus to meet your lifestyle expenses on retirement. Estimate your retirement lifestyle expenses early on in life, invest in a manner that you have sufficient retirement corpus.

A well planned holiday just like a well planned investment will go a long way in creating lifetime memories.

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