Manasi Deshmukh is a 25-year-old HR professional, working with a BPO in Mumbai. Out of her total monthly take-home, she manages to save about Rs 15,000. Her investments largely center around 'safe' avenues such as NSC, PPF, infrastructure bonds and premiums paid to the Life Insurance Corporation towards insurance policies. “Most of my investments are made around the year-end, when its time to save tax”, she confesses. This year, she was taken in by the rush of equity mutual funds IPOs and has invested around Rs 15,000 in them.

Maya Kumar is another young turk from the IT sector, who is left with around Rs 17,000 every month after she meets all her living expenses. Maya's investment comprises predominantly of PPF. She also regularly invests Rs 5,000 every month in a bank recurring deposit. She says, “This is just to ensure that I don't keep all my investments for the year-end.” Her total investments work out to about Rs 1.5 lakh per year.   “The rest,” she says with a smile, “remains in my bank account”.    

Equity Rules

Their example confirms what most financial planners believe - that most young earners invest their money in low yield instruments and hence are losing good returns on that amount. Deshmukh and Kumar, for instance, hold recurring deposits. Investment consultant Sandeep Shanbhag says, “While the recurring deposit is a good savings habit, the interest thereon may not be enough even to cover inflation.”

The year-end savings of such people are mostly a picture of neglect. Commenting on this, Investment Advisor, Ajay Bagga says, “Their year end planning is more a tax minimisation plan, rather than one that would meet their financial goals in the long term.”

Both Deshmukh and Kumar are significantly biased towards fixed income. The most prominent recommendation or the ideal portfolio that all experts have for this profile of people is to increase exposure to equity. Shanbhag says, “The only time when you can take advantage of equity without sweating the risk is when you are young. Fixed income will gradually follow along with age”.

Bagga also seems to agree. He says, “For someone with this profile, I would recommend a portfolio that has 90% in Equity Mutual Funds, and 10% in fixed return products like PPF, Recurring Deposits, Bank Deposits”.

“All investments must be made on three criteria, the investors risk appetite, time horizon and financial goals,” feels Bagga. “Both these ladies are young professionals, with a long time for retirement. This is the time for them to maximise their long term returns by investing in equity assets like mutual funds,” he adds.

On the recurring deposit, while both experts agree that it is a good habit, they feel that it can be looked at purely for the purpose of diversification. “A systematic investment plan (SIP) in a diversified mutual fund scheme, which is like an RD itself would prove more beneficial”, suggests Shanbhag.

Another interesting point is that both of them have parked a significantly large amount of money in their savings account. Shanbhag says, “While everybody has to keep some amount in the bank for day-to-day requirements and emergencies, the rest should be invested in short-term (money market) mutual fund schemes. In these, the returns are higher and the liquidity is great (you can get your money back in 3-4 days).”

Bagga suggests that around 6 times the monthly expenditure can be kept in a liquid asset like a bank deposit, as an emergency pool.