Advait Phatarfod, Graduate student at NYU- Real Estate (Finance & Investment)

I have read most of the top voted answers on this thread and am thoroughly impressed with the quality of the answers. They are all very informative! I would still like to share my 2 cents.

So you are now 22. That’s great! Let’s assume you have graduated now as an engineer (most likely) and placed with a MNC (again most likely). Say you make about 9 lakhs p.a. with an approx. take home salary of 60k p.m. So what do you do with this money, or rather what should you do with this money?

Invest!

Remember, the next 5-7 years are the golden years of your life. You do not have many liabilities. I assume that your parents would still have a few working years before they retire and you take over the mantle of ‘running the household’. Make the best of this time to grow your money. Make your money work just as hard as you do!

How and where to Invest?

In the world of Investing, what is sauce for the goose, IS NOT what is sauce for the gander. There cannot be a fixed rule applicable for all because everyone has different needs, goals and wants. Every one has a different financial background and a different risk appetite. So where does one start in general?

Begin with jotting down your goals and years you have in hand to achieve this goals. Once you do this exercise, you will have a fair idea of what the whole picture looks like.

Some of the goals that would be common to the most would be:

  1. To buy a house in a metropolitan area
  2. Healthcare expenses of Family ( Your parent’s are getting old, remember that)
  3. Children’s Education
  4. Planning for Retirement

Now lets go step by step with this.

Insurance

First things first. As soon as you start earning, buy yourself a Term Insurance cover with the maximum term. They are the cheapest and the best form of Insurance. IRDA allows you to buy a cover that is 20 times your annual income. So if you are earning 10 lakhs, you are eligible for a 2 crore cover.

Why this hurry in buying a term Insurance?

Because the premium amount goes up with your age. And the premium amount remains constant through the life of the policy. That means if you get in at a low premium, you continue paying that amount for the next 35-40 years.

How much does term insurance cost?

You can compare different plans on sites like http://policybazaar.com

For a 22 year old Non smoking Male, the annual premium for a 2 crore cover should be about 13K.

I would recommend readers to go for maximum cover that they are eligible for and asses their need for insurance at different stages of their career with a financial advisor and add more cover if needed.

Term insurance provides your nominee with the amount in case of your demise, and should be sufficient enough to replace your income, considering the average rate of inflation and future value of money. Now go do the math for yourself…

Planning for a house in a Metro

Real Estate investments require large sums of money. You need to build on a corpus for the down payment for your flat (20%) and avail of a home loan for the remaining amount (80%) Given that the time frame for this is 8-10 years and considering the price appreciation in the cities, it will be hard to find a 2BHK apartment in a big city for anything less than 2Cr.( I am talking about the Mumbai market but other Indian cities are not far behind) That means you have to be prepared for a down payment of 30-40 lakhs. While it is very likely that your parents, your spouse will pool in to reach this amount, we need to plan for the worst 🙂

All investment vehicles follow a cycle.While ‘what goes up has to come down’ philosophy might work in case of Gold, stocks etc; it does not entirely hold true for Real Estate.Real Estate prices do not fall steeply, even when the liquidity is low in the markets or the interest rates are high for many reasons. We have seen price drops only in areas of metro cities which have been overly saturated While I won’t get into the reasons why the prices don’t fall steeply, the bottom line for us is Real Estate investment is much safer than investment in stocks and gold.

Option 1: Buy Real Estate where you can afford to buy (Tier 1 or 2 cities) in two years, sit on it for 5 years and sell it after 5 years to fund the down payment for your apartment in a Metro that you want to buy in 7-8 years.

After your personal expenses are met, keep aside 40K for investing.I would recommend putting aside 10K each in top two performing Debt Mutual Funds, 10K in top equity Mutual fund and additional 10K in your PPF (or NSC) account. You can easily play around with this allocation depending on your risk appetite.

Debt fund will protect you from market volatility, Equity fund will give your returns that little boost and PPF will give you peace of mind 🙂

EDIT: I would recommend you to make use of ELSS (Equity linked saving scheme) to claim tax deductions upto 1.5 lakh every year under section 80C of Income Tax. As ELSS has a 3 year lock-in period, I would not advise you to put anything more than 12.5K  per month into this. You can split this amount and invest in the top two performing funds.

Assuming that debt gives you around 12%, equity 14% and PPF will give you a 8.7% (as of 2013-14), your equivalent returns are likely to be around 11%. Let’s assume your money grows at 10%, you would be having around 10.6 lakhs at the end of two years! Congratulations.

Now use this amount as down payment towards buying a piece of Real Estate that is around 40 lakhs. 10.6 lakh will be your equity in the apartment and the remaining amount can be financed by a home loan. Your monthly outgo on EMI is likely to be around 32K assuming an interest rate of 10.5%. You can continue investing the surplus money in hand( 40K-32K=8K) in a Mutual Fund of your choice.

Assuming a modest appreciation of 15% on your Real Estate investment, it will be worth 81 lakhs in 5 years when you put your property on the market to sell it.

Now before you become too happy, remember that you have to pay off the mortgage on your house. The balance payment on your 30 lakh loan would be around 23.7 lakh. So after you payoff your loan , you will have 57 lakhs with you. Discarding selling costs and some other costs, you can have a booty of about 55 lakhs at the end of 7 years.Due to intense competition in home financing sector, most banks these days do not charge prepayment penalties, and you should take benefit of this.

Use this money as your equity in your ‘Dream Home’ and finance the remainder amount via a home loan again. Remember that this house is going to be your asset for the better part of your life.

I expect your salary to have increased in the past seven years and you and your spouse will be able to pay 1.5 lakh EMI, assuming you purchase a 1.8Cr apartment with 1.3 Cr loan.

Option 2: For those who are not comfortable with the idea of dabbling in Real Estate, you can continue investing the entire amount in Mutual funds. You will end up with around 49 lakhs at the end of 7 years assuming a 11% return on your money.

Some of the benefits of investing in Real Estate are:

  1. You can claim tax deduction on the interest you pay on your loan every year.
  2. You can have a monthly cashflow if you rent out your apartment, which is again tax free and can be again invested.

As you will be selling the apartment after 5 years, there will be no short term capital gains tax on it. Instead, you will have to only pay a long term capital gains tax at 20% after indexation.Also, as the sale proceeds will be directed to another property immediately, you can avoid paying any tax on that 55 lakhs.

EDIT:

  1. Unlike investments in Stocks/ Mutual Fund where your principal is at risk, Real estate is a very safe investment. Looking at overall markets in 2015, the property prices have not appreciated much in the past years. However there has not been erosion of capital. Compare that with Equity market, where even the Best Portfolio managers have negative returns in the past 6 months.

(Disclaimer: I am a student of Real Estate and it is possible that my views are slightly biased towards this particular asset class.)

Planning for Retirement

While you may wonder why you need to worry about a goal that is almost four decades away, but retirement planning is not only required but it is in your best interest that you start early. With advancement in Medical Sciences and a lifestyle that is more comfortable than our previous generations,our generation is destined to live longer. The more the number of years that you live after retirement, larger the retirement corpus that you will need. And longer you live, more the amount of money that you will have to pump into your health to keep yourself going. We all know the power of compounding and you don’t want to loose out on these precious years and start thinking about retirement only in your thirties. While your EPF account would be growing all these years, once your Big Investment targets are met, consider slowly increasing the EPF contribution. This will be your safest bet for retirement. If you are a more adventurous type, consider putting that surplus fund in Hybrid Mutual funds which are a mix of 80 % Debt and 20% Equity. If you are comfortable and have a long horizon, you can invest some amount in mid caps stocks that may go on to become large caps in 15-20 years. In case you fail to have good numbers by the time you retire, don’t freak out. You can consider  Reverse Mortgages.

Meeting other Short term and Long Term Goals

As and when you start understanding the nuances of the stock market,open a Demat account with a bank/broker. Buy shares of Companies whose business you believe in,and not because the shares of that company are going up. Try and restrict yourself to Category A shares. They are good companies and less volatile. Buy good stocks when they are cheap, and forget about them. Keep doing this when the market is down and they will work well for you in the long term. Stocks/Mutual funds will take care of major expenses like marriage, children’s education, buying a car, foreign vacation etc.

Some other tips:

  1. Buy Gold whenever you have surplus money available. Buy it from a consumption point of view and only as much as your family might need in the years to come.You can use some of Gold ETF’s  for this.Buying Gold as an asset does not entirely make sense to me. Is it a good idea to invest in gold in 2013?
  2. Take a Health Insurance plan for your parents, if they are not already insured. Any hospitalization or Medical expenses can have serious consequences on your financial planning.

Most importantly, spend only after you save and not save after you spend.

I hope this gives you a fair idea about what to do with the money that you have started getting into your account every month. Cheers.