I previously wrote about this topic and shared it with a couple of friends to help them get started with investing, but they found it too complicated. So here is an even more simplified version that makes a lot of choices for you. This assumes that you won’t need the money you are investing for at least 10 years.
But before you get into investing, you need to set a few things in order.
Emergency fund
The purpose of this fund is to give you a reasonable buffer if you are unable to work for a short period (due to layoffs, a family emergency, etc.). Ideally, the amount kept aside as an emergency fund should equal six months of your expenses. You can increase or reduce it as per your comfort level.
You could keep the money parked in a savings account or create multiple small fixed deposits (multiple so that if you have to use part of the emergency fund, you don’t pay the premature withdrawal penalty on the entire investment). Just make sure that you can break the FD and get the money online whenever you want.
If you are in a taxable bracket, you could use liquid mutual funds that offer Insta Redemption. The major benefit of this is that you pay tax only when you withdraw from them, as opposed to every year on FD and savings account interest. If you decide to take this route, break up your emergency fund into multiples of ₹60,000 and invest in liquid funds from any of these fund houses: Kotak, Nippon India, Aditya Birla Sun Life, DSP, or Capitalmind. This list is not exhaustive, just the ones I am aware of. I suggest ₹60,000 because the maximum amount that can be instantly redeemed in a day is ₹50,000 or 90% of the investment value, whichever is lower. So if you have ₹60,000 each across four funds, you can redeem ₹2 lakh instantly.
Insta Redemption does not work if your investments are held in demat format (e.g. through Zerodha Coin). Here is an article and a YouTube short on the instant redemption feature if you want to know more.
Do remember that this money is for real emergencies, not to be dipped into to buy that shiny new thing.
Health insurance:
An unexpected hospitalisation can derail your finances substantially. Don’t just rely on the insurance policy provided by your employer. Get a personal health insurance policy if you can afford it.
Term insurance:
If you have people who are dependent on you (or may depend on you in the future) financially, get term insurance. Ideally, in your 20s. If everyone around you is well off, you don’t need one.
The good folks at Ditto or OneAssure can help you pick both health and term insurance.
With these in order, let’s dive into investing.
A simple way to get started
The simplest approach is to start investing in a single index fund. And a good index fund to start with is Zerodha Nifty LargeMidcap 250 Index Fund.
If you would like to know why this index, PrimeInvestor has written an excellent article about it. Why Zerodha? I like the company and its philosophy. They have gone big on passive funds. You could go with Edelweiss’s fund that tracks the same index if you wish. Recently, many other fund houses have launched funds tracking the same index, but they are too new for me to recommend.
You can run a monthly SIP in this fund until your monthly investment crosses ₹1 lakh. At that point, refer to the Where to go from here section in my previous post.
If your monthly SIP has crossed ₹50,000, you could invest the additional amount in PPF (max ₹1.5 lakh/year). It is tax-free and can serve as your initial debt/stable investment. If your employer lets you invest up to ₹2.5 lakh in EPF, you could invest in that instead.
That’s all you need to get started, really. Just one mutual fund and, optionally, PF. You can set this up and focus on your career. Once your investments become sizable (say ₹50 lakh), you could get help managing them through fee-only advisors, or something like a Portfolio Management Service (PMS) if you would like to go completely hands-off.
But don’t let inertia fool you into keeping your money in a savings account, or into investing in suboptimal products sold by your neighbourhood uncle.
Happy investing!