Congratulations! You have made up your mind and starting your investment. But you must follow below Points to consider before Investing in any instrument.
Emergency Fund
Life is very uncertain, no one really know what is going to happen in next fraction of second. But we should not overthink on this rather be prepared for all such uncertain things. Everyone has some fixed expenses in their day-to-day life like House rent, electricity bill, mobile expenses, medicines, groceries, Kid’s school fees etc.
So, to cover up all these expenses, in case of any unfortunate incident like Lay-off, medical emergency, we should understand our monthly expenses and categorize like below.
| Expense | Amount | Expense Category |
| Rent | 10000 | Necessity |
| Electricity Bill | 1000 | Necessity |
| School Fee | 3000 | Necessity |
| Groceries | 2500 | Necessity |
| Eating out | 2000 | Luxury |
| Milk | 1000 | Necessity |
| Shopping | 3000 | Luxury |
| Total | 22500 | Necessity = 17500 Luxury = 5000 |
Since now you have listed your monthly expenses and you know that you at least need 17500 in month for covering your necessary expenses.
You must at least have an emergency fund of 6 times of necessary expenses, in this case it becomes 105000.
Ideally this amount should be 12 times of necessary expenses, but keeping it 6 times is a must.
But important take away is, before investing in any instrument you should build your emergency fund.
How should we build it
Let’s say you are having some spare amount of money every month and that is what you are considering for investment, same money you can start saving for emergency fund. There are multiple instruments where you can keep this fund. This fund’s liquidity is most important thing which you should consider. Liquidity means, how quickly you can get this money make available for spending in case of emergency.
Bank account
You should not keep all your funds in your savings account. You may consider opening another saving account and put an auto sweep-in fixed deposit on this new account. Auto sweep is a wonderful way of getting good interest on your savings and most importantly it remains liquid, you can withdraw your money even in fixed deposit through your debit card at any point of time. Consider reading this if you want to understand why keeping your money in a saving account is not advisable.
All you need to do is just transfer your money in this account and based on your sweep setting you money will be automatically converted to a fixed deposit.
Liquid Mutual Funds
You may consider buying liquid mutual funds. These are little different from normal equity mutual funds in terms of liquidity. Generally, it takes around one week to get your money in your bank account in case you sell your equity mutual funds, but in case of Liquid Funds, it takes around 24 hours to get your money out of mutual funds. Another thing is liquid funds are considered more secure, since majority of the investment goes into debt instruments.
Fixed Deposits (FD)
If you do not want to do any new thing complex, simply buy fixed deposits every month. But while buying your fixed deposits, do not buy in bulk. It means let’s say you need to maintain 105000 as emergency fund, do not buy 1 FD of 105000, rather buy 3 FDs of 25000 and 1 FD of 30000. This will ensure that whenever you are breaking your FD as per your requirement, you will not lose interest part on all your money.
It means, let’s assume you need 15000 for some emergency, you can just break 1 FD of 25000 and rest of your FDs can keep on growing with the interest.
Health Insurance
After this pandemic everyone has realized that health is most important. Sometimes health related expenses can make a big hole in your pocket. So before starting your investment journey, you should consider buying a health insurance. People tend to not buy a health insurance if they are covered under some corporate health insurance plan provide by their employer.
You must consider buying health insurance independently, since you never know when you are going to change your employer, and if there is going to be any gap in between two employments. God forbid anything happens to you and your family’s health during that period, it will be financial mishap for you. Another thing is like in case of corporate group policy, your employer is going to take the decision every start of the year that which policy is going to cover the employees, and I believe you will prefer taking your own decision in terms of health insurance.
Another point which you must consider before buying a health insurance policy is, you should always buy health insurance for them separately. So you should buy 2 health insurance, 1 for you and your immediate family and another for your parents. This way you will be able to save a lot of money in premiums.
There are multiple other factors to consider, while buying a health insurance. Do let me know in comment section if you want a detailed Blog on this topic.
Term insurance
In India, people are very hesitant in buying a term insurance plan for themselves. They will buy insurance for their 2-wheelers, cars etc. but they are not OK in buying term insurance. And believe me, they are putting their family in a big risk. Even if they buy so-called insurance policies like ULIPs or any other insurance+ investment plans, that’s really not enough. Since the insurance coverage is way too less.
While buying any insurance you must ensure that total insurance coverage you get is at least 8 to 10 times of you annual income. If you have 2 earning people in the family, both of them should buy individual term insurance for themselves.
If the sum assured is 8 to 10 times of you annual income, then in the event of any unfortunate happening, your family can easily live their life and manage expenses without any disturbance by investing the money.
There are multiple other factors as well while buying term insurance, do let me know if you want me to write a detailed article on that.
Conclusion
Once you have considered these 3 points, then only you should start investing your money in any instrument you like. In India we have multiple options for investment. You can identify your risk appetite and choose wisely and diversify your investments.
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