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Financial Advice for Freshers and New Investors

adminbmt November 8, 2013

A lengthy but worthy read…

You might have just come out of college and secured that wonderful job! While your bank accounts are filling in every month end, you do not have any clue about investments! You simply don’t understand the complexities!

Well, you are not the first person to face the dilemma! More than often, freshers get misguided financially. Hence we thought that we should jot down the ABCs of investments, especially for freshers.

The suggestions listed below are generic i.e. they apply in most of the cases. But in certain cases, the generalization may not be applicable or may need to be extended. For instance, while most freshers are bachelors, some might me married.

All suggestions are important and must be implemented by freshers if they desire to live a financially secure lifestyle. Luckily the number of suggestions came out to be 7. Thus we can call these as ‘7 Financial Mantras for Freshers’!
1. Get A Life Insurance Policy

This is probably the first investment you must make. In this age of uncertainties, you must secure your life first. In a nutshell, a life insurance policy pays the sum assured to the nominee in case of death of the insured. The insured, on the other hand, pays yearly premium for the policy.

There are numerous considerations while buying a life insurance plan. The most prominent ones are listed below.

  • Select a appropriate sum assured. Various websites provide tools for calculating the appropriate amount of sum assured.
  • Buy an online term policy. Many companies like HDFC, ICICI, Aviva, etc sell online term policies. The premiums for such policies are very low compared to other types of life insurance policies.
  • Avoid market linked plans. Such plans invest a part of the premium in various investment instruments like equities and bonds. The charges levied on market linked plans usually reduce the returns from such plans.
  • Buy the life insurance policy as early as possible. There are two reasons for buying a policy early. Firstly, your life cover starts as soon as the policy is issued. Secondly, the yearly premiums rise according to age. Thus the yearly premium for a 30 year old person would be higher than that of a 22 year old person for the same sum assured.
  • Select an insurance provider with high claims ratio. Simply put, it is a ratio of claims paid to claims received. Companies reveal their claims ratios periodically. Higher the claim ratio better the company.
  • Many employers provide with very cheap life insurances as long as you are employed with them. You should go for such policies. The policies cease to exist as soon as you leave your organization.


2. Get A Health Insurance Policy

Most employers provide with a health insurance(mediclaim) policy these days. Under such health insurance policies many exclusions are waived. You should opt for such policies. However it is wise to opt for one more health insurance policy for certain reasons.

The health cover provided by your employer will cease to exist if you leave the company or are laid off. Thus if you are between jobs or are starting your own business, you will need to have health cover!

You should take into consideration below mentioned points while buying a health insurance policy.

  • Opt for appropriate amount of health cover. Usually a cover of 3,00,000 per annum suffices.
  • Check for exclusions. Various treatments are excluded from health cover for various periods. These are called exclusions. Some treatments are not covered for the first year, some are not covered for first 2 years and some are not covered for 4 years. Some treatments may be permanently excluded.
  • Check for the list of network hospitals. These hospitals are preferred by the insurance company. You need to check for network hospitals near your area. You don’t want to rush when in emergency!

3. Start Investing In Mutual Funds Via SIP

Not all investors have time, patience, money and risk tolerance to understand stock investing. Mutual Funds ease out worries of such investors.

Mutual Funds collect money from various investors and invest the pooled amount in various instruments like shares, bonds, derivatives and sometimes even in other mutual funds.

SIP is a disciplined way of investing in Mutual Funds. SIP stands for Systematic Investment Plan. Basically an investor invests a predetermined amount in a particular Mutual Fund scheme per month at a predetermined date.

Ex – A investor creates a SIP to invest 2,000 in an equity mutual fund scheme. Thus, every month, he would invest the same amount at the same date in the scheme.

There are certain advantages of investing via SIPs. Firstly, it nurtures the much needed discipline needed for financial success. Secondly the investor benefits from rupee cost averaging.
4. Start Monitoring Selective Stocks And Create Dummy Portfolios

Many websites provide new investors with stock investing games. Investor is provided with lots of virtual money which he can invest.

We recommend that new investors use such games to learn the basics of stock market before putting in actual money. Such games help you to create investing/trading strategies.

Typically new investors should try out dummy investments for 3 to 6 months before putting in real money.
5. Avoid Too Many Credit Cards Or Misuse Of Credit Cards

I am sure that you must have received at least 5 calls for buying a credit card! Do not fall prey to the marketing gimmicks of the credit cards companies. They may offer you lifetime free cards, higher credit limits, etc.

Follow these general guidelines when it comes to credit cards.

  • Do not go for more than 2 credit cards.
  • Go for a modest credit limit. You really do not need a credit limit of 5,00,000! A credit limit of 1,00,000 more than suffices.
  • Use your credit card only when you would have used your debit card. Try to differentiate between needs and desires.
  • Pay off your credit card bills before due date every month. Do not keep any outstanding balances.

6. Avoid Personal Loans

Personal loans are very very costly. The rate of interest on these loans is very high compared to other loans like home loans. The interest rates could be as high as 20%! Let us have a look at an example.

For a home loan of 10,00,000 @ 10.5% for 10 years, the EMI is 13,493(approx). The EMI for a personal loan with same loan amount for the same period @ 18% is 18,019(approx)! The difference per month is 4,526. It turns out that you pay back 543,120 more in case of personal loan!

Please note that we are asking you to avoid personal loans. Sometimes personal loan might be the only option to go for!
7. Implement A Monthly Savings Plan

Let us assume that your monthly take home salary is 20,000. You need to decide on how much you need to put aside for investments.

Being a fresher, most likely, you do not have many liabilities. Say you decide to save 25% of your monthly income. Thus you need to put aside 5,000 every month.

You could invest your savings in many different ways. Some people prefer creating Recurring Deposits out of the amount. You might want to start a SIP in a good equity oriented mutual fund. Some people prefer traditional investments like gold, silver, etc.

We recommend investing in a combination of instruments. Ex – You might want to put 2,500 in SIP and buy gold out of the remaining amount.

Whatever you decide you need to stick to your plan for long term appreciation of your wealth.

The Final Word…

Of course, there are many more complexities in real world. All the same, we have laid out the starting guidelines for new investors and freshers. Wishing you luck with your investments!



Contributed By:

Investor School


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