How much should I invest and where? This is one common question that comes up when you decide to invest your hard earned money. The truth is, there is no ‘number’ that can provide you with the exact amount that you would have to invest to get good returns and a good night sleep. The answer to this question lies within you. But how do you explore this to find out the exact amount? The general rule of thumb says that you can comfortably invest about 20% of your net income. This would include your investment in stocks, bonds, retirement fund and real estate. You also need to figure out your ability to handle emergencies with liquid cash.
- Let’s explore the stock market first. Your investment in stock market is purely dependent on your risk taking potential. Experts suggest that a general rule of thumb for your investment in stock market is ‘100 minus your age’. Investment in high yielding stocks coupled with diversifying your portfolio is the secret to earn good returns. The general misconception lies that higher the risk taking ability, higher the return on investment. But, abrupt and unplanned investment in shares could lead to higher risks with lower returns. In short, the number of shares or the share price of a stock should not be your driving force for purchase. Instead, create realistic goals and reasonable allocation for the stocks that you are buying. And again, diversify your portfolio to reduce your risks. You cannot time the market anyways!
- Mutual funds are another way to invest your money with lesser risks and they allow you to diversify your portfolio much cheaply than you can do if you invest on your own. Mutual funds help you to manage inflation fairly well too. However all investments come with a catch of ‘Taxes’!!! Taxes take away a very big bite on all your returns. If you own some dividend paying stocks, even if you don’t sell any of those, you still end up paying about 30% of your returns as taxes. However, if you hold onto your stocks for more than a year, you could get them tax free too. So, if you want tax free returns, the key is ‘invest and forget’….not literally of courseJ. Invest and hold on to stocks for long term to reap maximum benefit.
- PFs, PPFs and Fixed deposits are your safe bet options, which are low risks and corresponding returns. However pf components are fixed based on your employer and you do not have many options in this arena. Many companies provide you with a choice of opting for your PF contribution. It is always advised to invest some minimum amount of your salary into PF. Remember; this can turn out to be a huge retirement kitty since it provides 8.5% cumulative returns, if you invest on a regular basis.
- Another option is real estate. Again your age plays a very crucial role is determining the amount you would like to invest in this. Home loans are probably the cheapest source of debt that you can get. So why not!! Use it effectively to build your house. Overpay your mortgage amount if and only if you consider that your investment elsewhere would fetch more returns than the mortgage interest.