Questions holding you from starting Investments
In last few months, I got several call/message/email asking very basic personal finance questions to which most likely even person who was asking had a fair idea but he/she was afraid to commit to personal finance.
Here is my attempt to address them, hopefully it will help them.
Q: Do I really need life insurance, I am just 25.
A: If you are having dependents, who are dependent on you to provide financial support either right now or in future then you need life insurance irrespective of your age. In fact, sooner is better.
Q: How much life insurance do I need?
A: There are many formulas to calculate life insurance number. Instead of going in details, just multiply annual expenses of your family with amount of years you want to provide financial support, usually 10, add your outstanding loans and bump it up to next multiple of 5 or 10 lacks. That’s the minimum life insurance you need.
Q: Money in bank account or invested in assured return product is safe then why do I need investment?
A: Everyone needs money in their bank account, I am sure even Prime Minister maintains one. Money in bank provides convenience of any time withdrawal. But tell me from your past few years expenses, how many times you needed more than say five thousands for expenses which were unplanned. I bet not more than number of fingers you have. So, it’s always advisable to keep some amount for emergency and invest remaining.
Q: Isn’t equity related investment risky?
A: Of course. Equity investment is risky, if you keep on monitoring day-to-day. In long term equity has potential to beat inflation and provide real appreciation. I struggled to find any other product which beats inflation consistently post tax treatment. Please let me know in comments if you know any.
Q: Isn’t gold safe investment which beats inflation all the time?
A: Gold had fantastic appreciation in last decade. But if you observe it’s last few years trend, it is not doing as well as it did earlier. Other problem with gold is, we need safe place to safeguard it. There is always risk of it being stolen. I prefer to have it in paper form, either gold ETF or Bond. And, certainly not more than the defined portfolio allocation.
Q: Tell me best product / fund to invest.
A: You don’t need best product, seriously. After many days of research whichever product you zero-in may not stay best in future, as market is uncertain and that’s the beauty of it. You will disappoint yourself when you see your best product doing average if not bad. So it’s certainly not needed to spend time to find best product, instead find one good enough and start investing immediately, otherwise you will miss the entire purpose of investment and in worst case you will not invest at all.
Q: Do I need to commit for long term on any investment?
A: If your goal is long term then you certainly need long term commitment. But you need commitment to goal, not to chosen fund. You can always replace below average product with another good enough product. But it is recommended to give any fund few years to understand how it handles economy cycles.
Q: Can’t I have same portfolio throughout life?
A: Of course, you can. If your risk tolerance is same and no life changing events then certainly you can have same portfolio for long term. But that may not be case with many so it’s always recommended that you recheck your risk tolerance and adjust portfolio accordingly every few years. Please read my article on benefits of asset allocation.
Q: Who cane first chicken or egg?
A: I saw chicken coming after me so chicken should be second.
Q: Is glass half full or half empty?
A: I am thirsty after long article.
OK, last two were not finance related but I was asked anyways. I am glad that you read it till end. Thanks. Do let me know your financial questions in comments.
Originally published at The Simple Personal Finance.