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I work in IT sector and wants to invest for tax saving health Insurance and for buying a car

I work in IT sector with 33-38k salary/month, Age: 25. I have a surplus of 10-15k per month, From April, 2016 on wards. I plan to invest about 4k/month in Recurring Deposit; another 3k/month in Axis Long Term Equity SIP. I don't have any health/life insurances. I wish to have 5 lakhs separate for a car maybe 5-6 years down the line. Could you please suggest where else could I invest my money or how to plan my investments in total?

Feb 22, 2016 by Alex, Bangalore  |   General

It is good that you have started planning your investments at a young age. This will go a long way in ensuring that you meet your different financial goals. The investments that you are planning will bring you to an asset allocation of 57% debt and 43% equity. Prudent asset allocation norms, however, suggest that a young age a majority of your investments should be in equity. The rule of 100 is a popular asset allocation rule. It suggests that 100 – your age, should be the percentage allocation to equities (please see our article, Asset Allocation strategies for different age groups). Since you are 25, as per this rule, your allocation to equities should be 75%. However, every person has unique needs and investment temperaments. You should give asset allocation some thought and make your decisions accordingly. You should consult with a financial advisor, if you need help in optimizing your asset allocation.

You want to buy a car in the next 5 – 6 years. Is your Rs 5 lakhs budget based on current prices or does it factor in inflation? While historically, automobile price inflation has lagged the CPI inflation, just to be conservative you should factor in the CPI inflation in your budget, unless you have already done. Assuming a 15% return on your equity investment, you need to invest Rs 5,500 – 6,000 per month, to accumulate sufficient funds for your car purchase 5 – 6 years down the line. You plan to invest Rs 3,000 is Axis Long Term Equity Fund. You should plan to invest another Rs 2,500 – 3,000 in another good equity fund in order to meet your car purchase goal. It is not clear from your query how much tax you are paying every year. You can save Rs 150,000 is taxes by investing in Equity Linked Savings Schemes or other investment options under Section 80C. You should calculate how much 80C investments you need to make to minimize your taxes every year. If you need to make more 80C investments to save taxes, then you can simply increase your Axis Long Term Equity Fund SIP or invest in some other good ELSS funds (please see our article, Tax Planning: Review of top 6 Equity Linked Mutual Fund Saving Schemes). The balance savings you can invest in a mix of large cap, midcap and diversified equity mutual funds. We have reviewed the most consistent performers in these various categories in our following articles:-

Best mutual fund consistent performers in 2015: Large Cap Funds

Best Small and Midcap Mutual Funds: Consistent performers for investment in 2015

Best Diversified Equity Mutual Funds: Consistent Performers for investment in 2015

You can select some consistent large cap, diversified equity and midcap funds based on your preference. You should consult with a financial advisor if you need help with fund selection.

The more you are able to save and invest now, the greater success you will have towards your long term investment goals, like house purchase, retirement planning etc. Many young people think that they need not worry about retirement planning in their 20s and early 30s. However, our view in Advisorkhoj is that the 20s is the ideal age to start investing towards retirement. The rule of investment is very simple. Longer the period you invest, higher is the percentage returns. This is also known as the power of compounding (please see our article, For early starters power of compounding can be magical). You can also check out our retirement planning calculator and this will help you get a sense of how much you need to save for your retirement.

As regards to life insurance, if you are single and have no dependents it is fine to not have life insurance. On the other hand, if you have dependents or plan to get married in the near future, life insurance is a critical financial needs. Life insurance premiums increase with age and therefore the earlier you buy life insurance, the more you will save in terms of premium over the policy term. When buying life insurance it is always prudent to go for term plans. The premiums of terms plans are lowest among all life insurance products and you will have a higher surplus to invest towards your long term financial goals (please see our article, How to select the best term life insurance plan for you).

With regards to health insurance, if you are covered under your company’s group health insurance plan, then you may not have to buy individual health insurance. However, if you are not you should consider buying Mediclaim. Even if you are covered under your company’s group health insurance plan, you should check the plan coverage and see if it meets your dependents and your health insurance needs comprehensively, and then decide if you have to buy additional health insurance for your family. Needless to say, life and health insurance are more critical than investments.

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