Dubai-United Arab Emirates
By Sanjay Matai
Some wise people have made a smart new year's resolution for 2008: to manage money better. Are you one of them? We have a checklist of ideas to help you get started. So, whether you take a loan or are planning to invest, keep these thumb rules in mind.
Smart loan mantras
Borrow money to buy ONLY useful assets, such as a home, a car or to fund your education. It's a strict ‘no-no’ for personal loans, credit card loans and if you plan to take a holiday on equated monthly installments (EMI).Your EMI for all loans put together should not exceed more than 40 to 50 per cent of your take-home salary. Before opting for a loan, shop around for the cheapest interest rate.
Getting insured?
Buy insurance when you really want to be insured, not when you want to invest or save tax. Your insurance policy should provide financial security to your family, and here's why you must opt for one:
For protection against medical emergencies. Opt for a mediclaim policy. For protection of life or disability. Opt for a term or accident policy.For protection of home loan. Opt for a term or mortgage policy. To protect your home and valuables. Opt for a home insurance policy.
Insurance plans like endowment, money-back, whole-life or unit linked schemes are not mentioned in the above category, because these are complicated, not to mention rigid; hence they should be preferably avoided. Remember, we are looking for simple, cheap, yet effective insurance plans.
Where to invest your money
Though, investment is a vast area, it can be broadly divided into three main categories:debt, equity and real estate. Depending on your risk appetite and time horizon, divide your money suitably across these three categories.
1. Debt
These investments are safe, secure and give fairly assured returns. You can further divide your debt portion into three to four sub-categories and invest as follows:
Time horizon
Investment avenues
Extremely short-term (1 day to 1 month)
Savings account
Short-term (1 month to 1 year)
Bank fixed deposit or short term debt funds
Medium term (1 year to 3 to 5 years)
Bank fixed deposit or fixed monthly plans
Long term (more than 3 to 5 years)
Public provident fund or post office monthly income scheme
If you don't have to pay any tax or you fall under a low tax bracket, you could choose a bank deposit or mutual fund.
2. Equity
Stay away from direct equity exposure. Instead, invest in Mutual Funds (MFs). Currently, there are more than 350 equity funds on offer. To make things simple, invest as follows:
50 to 75 per cent of your corpus in one or two existing funds
25 to 50 per cent of your corpus in three to four existing diversified funds with a 3 to 5 year track record
Note: Keep away from new fund offers, sector or thematic funds.
3. Real estate
Other than your own house, you could also consider additional real estate investment. However, this investment has some cons, as follows:
Investment in property requires a large sum of money, which is not available to most. Even if you can raise the money, investments in debt and equity may suffer and your portfolio may become imbalanced.
These investments involve high transaction costs such as brokerage, registration, etc. Instances of unclear or undisputed title to land and property are fairly common instances. You would need to take care of the additional costs to maintain the property.
A better alternative is to choose Real Estate Investment Trusts (REITs) or Real Estate Mutual Funds (REMFs). These are expected to hit the market soon and you could invest a part of your portfolio in such funds.
We hope these simple rules will help you mange your money better in 2008. Good luck!
The author is a financial planner and promoter of www.wealtharchitects.in. He can be reached at sanjay.matai@moneycontrol.com.
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