#65 - Personal Finance 101 - Where to invest?
Short-term investments - One should invest in recurring deposits. This way, you automate your investment decision. Rain or shine, on a particular day of the month, automate a rule with your bank that X amount of money should be deducted towards a recurring deposit.
Long-term investments - The best way to beat inflation is to invest in equity markets. Expected return from the equity market is 15%. One can enter equity markets by buying shares in preferred stocks. But tracking every company and its price is difficult. Instead, invest in mutual funds.Mutual funds are those funds that invest in stocks. They don’t invest just in a company. But they invest in a host of companies across sectors. This way, if one company or one sector has a bad financial year, a mutual fund will not be affected badly. They will weather it as their profit will be averaged out over a lot of companies across sectors. Basically, they are your personal wealth managers. Even in this, you should automate your mutual fund investment every month. This way you will be protected against a bear market (a market in which prices of equity shares are falling).
Basic contingency fund - It is a liquid fund that should have an amount equal to your 6 months of basic monthly expenses. This fund will come handy in case of a medical emergency or when you are out of a job.
Insurance - If you are the only earning member of your family, then it’s imperative to buy term insurance. Also, you should buy insurance for your healthcare needs. This will help your family when something untoward happens. But don’t use insurance as an investment instrument. It is not. Stay away from insurance policies or schemes where they position it as an investment for your future needs/retirement.
P.S. I have been writing on Personal Finance 101. Do I have skin in the game? I am 27 years old now. When I first started my career, I didn’t save much but I saved. I didn’t follow any disciplined approach in saving and investment. Then I founded a startup and bootstrapped with my money. After a year and a half, we had to shut down the startup. I was totally broke staring at a very serious debt. I decided to crawl back from this rabbit hole with all energy that I could muster. After 2 years, I am financially independent. I am trying to compile my financial learning in the recent years.