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Key personal finance queries, answered without fear or favour (Part 2)

I am sure you would have found the "right" solutions to some of your every day personal finance problems in Part 1 of this two-part series on our day-to-day struggle with our money matters.

In this Part 2, I address five more of such money-related issues.

All these queries have been chosen from the hundreds of inquiries that I receive every month.

Ques 6 : I've a loan to pay whose tenure is 12 years and 10% interest rate. I can pay more than the required EMI and finish my loan. What would be the best strategy: should I pay more EMI and finish my loan, or just pay the EMI and invest an extra amount in the stock markets?

Answer 6 : Given that one can earn around 15% returns in equity, it may appear tempting... and also reasonable... to invest the excess available funds into shares, instead of prepaying the loan where interest rate is 10% (which costs still lower due to tax benefits available on home loans).

However, one must appreciate that interest outflow is "certain and fixed every month". On the other hand, earnings from equity are neither assured nor regular.

Further, the 15% expected returns from equity is possible only over a long term, certainly not less than 5-7 years.

Therefore, one may invest in equity, instead of repaying the loan, ONLY IF
- s/he has the risk appetite for investing in equity
- s/he has the long term investment horizon
- in the absence of regular income from equity, s/he is still comfortable paying the EMIs

As regards investing in equity is concerned, as I have repeatedly advised, please do so through the mutual funds route only.

Get perfect answers to your personal finance queries and sleep like a baby

Ques 7 : What is the best SIP (systematic investment plan) in India? How much returns will I earn? How many SIP investments should one have in his mutual fund portfolio?

Answer 7 : Firstly, SIP is NOT an investment. It is a "process" of investing.

Like, recurring deposits where you make small investment regularly in a fixed deposit, SIP is making small investments regularly in a mutual fund.

Since people often get confused about SIP as a Systematic Investment Plan, I think SIP should be renamed as Small Investment Program.

Now, there are umpteen types of mutual funds. And, returns from these are market-linked. However, one can generally expect around 
- 12-18% returns p.a. over long term in equity-oriented mutual funds; 
- 6-9% returns p.a. over long term in debt-based mutual funds and 
- 9-12% returns p.a. over long term in hybrid funds.

By the way, you have to choose your funds carefully. You cannot simply and blindly chase the best ranked mutual funds.

As regards how many SIPs:

Typically a mutual fund portfolio should have around 12-18 funds across different types of funds and across different asset management companies or AMCs. This would create a well-balanced and diversified portfolio.

Ques 8 : I am in a huge debt (Rs.1.24 lakhs) due to my credit card. I cannot sleep because I am all tensed on how to clear the due amount. I earn only Rs.20,000 p.m. and I have to pay my rent and food too. How should I go about my issue?

Answer 8 : In case you are not aware, the interest cost on credit card outstanding amount is an enormous 30-50% per annum. Therefore, a two-pronged strategy is a must here. One, naturally, would be to reduce the outstanding loan amount as far as feasible. And two, to slash the interest outgo every month.

Accordingly, I am listing below a few alternatives on how to eliminate your credit card debt.

a) If you have any liquid investments such as Fixed Deposit, Gold etc., you MUST encash it, and immediately pay off the credit card dues. Apart from bringing down the outstanding debt, this will be a big... BIG... interest saver. You hardly earn 7-9% returns on these investments, while at the same time paying 30-50% interest on your credit card. Not a very smart thing to do!

b) If you have any illiquid assets such as LIC policy, NSC, house, etc., you must take a loan against it and pay off the credit card dues. This will substantially bring down your interest cost, and you would be able to clear your "new" loan, a lot more comfortably.

c) If you have no assets, you can explore the options of either converting the credit card dues to monthly EMIs or take a personal loan to pay off the credit card. This too will slash your interest outflow and make it relatively much easy for you to clear the debt.

Last but not the least, you must make all efforts to save Rs.1000-2000 (or more if possible) every month... first to accelerate the credit card / loan payments... and then to start building your assets. You have no option but to tighten your belt, if you wish to live a financially secure and comfortable life. 

Remember, there's no shame in cutting down on one's standard of living. It is like the pain and sour medicines that we have to bear with, to cure any disease or illness.

Ques 9 : How much returns can I earn by investing Rs.1 lakh?

Answer 9 : You can earn returns as low as 4% p.a. in the bank savings account; 5-7% in traditional insurance policies; 8-10% in fixed income products; and going up to around 15-18% p.a. on a long-term basis from equity and property.

Each investment has its specific features in terms of Returns - Time frame - Risk - Liquidity - Tax. It is VERY IMPORTANT that your choice of investments should match with your specific financial profile in terms of returns-time frame-risk-liquidity-tax. In short, best investments are a selfie not a photocopy.

Ques 10 : What are some tips for trading in the stock market?

Answer 10 : Frankly speaking, trading is no different from "gambling". Therefore, my most sincere advice would be to "not even think about it". 

Stock market is NOT an ATM, where you can simply walk in and withdraw money anytime you want to.

I hope, over these two blog posts, most of your doubts and concerns on managing your money - effectively and efficiently - would have been cleared. If not, you are most welcome to drop in an email.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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