The best investment plan is one which not only takes care of our needs but also creates wealth over time.
What I’m saying is nothing new, right? Investment advisors have been saying this for years.
But the problem comes in its implementation.
Buying mutual funds, stocks, bonds etc in the name of investment is not enough. What is essential is to follow a plan.
Yes, having an investment plan, and investing according to it is essential.
[How to make our money work harder for us?]
Need of a Road Map
Planning is required because it works like a road map.
This not only can create wealth in long term, but can also assists in financing of needs as and when it comes.
What I will share in this blog post is a template of an investment plan. This template can be used by any person (specially middle class people like me), whose desire is to invest using a definite plan.
Why to follow this template? Because what this ‘investment plan template’ can do is to establish a correlation between ones income, needs, and investment choices.
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The best investment Plan in India for middle class
This infographic can be a template, which one can use to prepare their own investment plan.
This template can work as a tool which will help you in establishing a correlation between your income, financial goals, and the selected investment options.
What is shown in the above infographics is this:
- Investment Funding: Even before one can start investing money, it is essential to start saving money. It is ultimately our savings which can fund all investment needs. Please read more about tricks to save money in day to day life.
- Investment Objective: For an average middle class person, it is important to have a right objective of investment. Because goal-less investing will be ineffective. I have suggested two investment objective in my template: (a) wealth creation, and (b) Need based investing. Read more about goal based investing here.
- Wealth creation: When investment is done for wealth creation, the investment horizon is endless. What it means by endless horizon? Just keep buying (no selling) right investment options month after month, and see the wealth grow with time. Read more about wealth creation here.
- Need based investing: Here we identify our other needs of life like home purchase, car purchase, child’s future, foreign tour etc. There will be two types of needs here: (a) short term needs, and (b) long term needs. Investment vehicle for each will be different. Please continue reading, you will get more about it here…
#1. Investment Plan for Wealth Creation
What it means by wealth creation?
It is a process of making oneself financially rich. How one can become rich? By accumulating more and more assets over time. No redemption is allowed.
We middle class people often misunderstands this financial goal, and this is a problem. Why? Because confusion here, ultimately prevent us from wealth building. What is the confusion?
‘Wealth building’ and ‘investment for need-management’ are one and the same.
Wealth creation needs to be an independent goal. It cannot be mixed with ‘need based investments’. Why? Because mixing our needs of life often eats into our desire of wealth creation. Hence it is necessary to keep them segregated.
Why our needs consumes our wealth? It is because “need” is a never-ending expense. The more we feed it, the most it will desire.
Moreover, wealth creation happens only slowly. The rate at which ones wealth grows (specially in the initial years), can be demotivating for some. But if you have the bigger purpose in sight, such psychological limitations can be overcome. So what one must do?
No matter how slow is the pace in initial years, one must keep funding the corpus without fail.
Just to give you an idea of how long it can take for a typical middle class Indian to build a sufficiently large wealth, let’s see an example:
- Wealth required: Rs.2.0 Crore.
- Starting investment (SIP): Rs.5,000 per month.
- Annual Increment to SIP: 10%.
- Average Investment Return: 15% p.a.
- Time required to build Rs.2.0 Crore: 22+ years.
Read more about the following here:
What is the point? The point is, anyways it will take extended amount of time to create wealth. If we also start draining the corpus from its initial days, wealth can never be created.
So even before we can proceed and start investing for wealth creation, it is important to segregate the following:
- Investments for wealth creation, and
- Investments done for managing our needs.
Once we have this clarity, the next step is to pick right investment vehicles. Which are the right investment vehicles for a common man?
For long term wealth creation, it is important to keep it as simple as possible. Preferable, keep the investments on auto-pilot.
How to do it?
- Index Funds (50%): When investment time horizon is as long as 20+ years, it is always better to opt for equity based plans. Why? Because it has ability to give maximum returns in such time horizons. But care must be taken to keep the investment well diversified. Hence Index funds, through SIP is suggested for us. Pros like John Bogle, Warren Buffett also suggests index funds. Read more about index funds here.
- Mid-cap funds (35%): When investment time horizon is long enough, mid cap funds give fantastic returns. Though their price volatility is high, but for longer time horizons, it works. Start a SIP in a good mid-cap fund and relax. Read more about mid cap funds here.
- Direct Stocks (15%): Why I am suggesting direct stocks, is it not too risky? Yes it is risky, but there is a way to manage this risk. How? By investing in only those stocks which are undervalued. Read more about how to identify best stocks here.
Special Note: Never forget that, for the goal of wealth creation the investment time horizon is forever. If you do not like the word forever, let me give a definite number. Stay invested for at least 25 years.
#2. Investment Plan for important needs of life
It is not enough to invest only for wealth creation. One must divert sufficient savings to manage important needs of life.
There are some priorities of life (needs) which is uncompromisable. If we do not plan for them today, tomorrow they will stare on our face and we will be able to do nothing. Such situations are dreadful. Example:
- Home for self occupation.
- Fund for Child’s future.
- Retirement corpus generation etc.
There may be some needs, though not essential, but they pose themselves on us as uncompromising needs. How? Due to our psychological limitations or social pressure. Example:
- Fancy vehicle purchase.
- Annual vacation
- Parties or social gatherings etc.
Important is to identify and create a ‘list of needs‘. Once this list is ready, build an investment plan for all. TIP: Anything whose occurrence you can predict 6 months beforehand shall be included in this list.
How to start? First, segregate the needs into two parts: (a) short term needs (< 3 years), and (b) long term needs (> 3 years).
Based on the available time horizon, start investing. The investment vehicles that can be considered by middle class Indian are the following:
#2.1 Investment for Short Term Needs
- Bank Deposits: I personally keep 50% of my short term investments here. As soon as you identify a short-term need, start a recurring deposit for its cause. This is one of the best available tools to manage such goals. Read more about recurring deposits here.
- Debt Based Mutual Funds: Debt based mutual funds are also great. In case you want to earn higher returns than a bank deposit, start a SIP in debt based funds. Read more about SIP in debt based mutual funds.
#2.2 Investment for Long Term Needs
- Multi Cap Funds (35%): Multi cap funds can provide excellent capital appreciation when holding time is 5 years or more. The returns that such mutual funds can generate can be in tune of 15-18% per annum. But the only control point for investors here is to stay invested for 5+ years. Read more about multi cap funds here.
- Balanced mutual funds (65%): These are equity based funds, but their portfolio also contains a portion of debt. In the revised naming terminology, such funds are called “hybrid funds’. Equity and Debt mix of such funds can be in 70:30 ratio. Due to presence of debt, price volatility of such funds are lower. Read more about types of mutual funds here.
We started this article with a query saying, ‘which is the best investment plan in India for middle class“? What is the answer? There are three parts to its answer:
Part #1: No investment can be successful if it is not following a goal using a road map. How to build a road map? A template of it has been shown in this article (see the infographic above). This is a simple investment plan which I follow for my self. It gives me clarity of where I am investing, why I am investing, and if I am doing enough to keep funding my goals at all times.
Part #2: For an Indian middle class, it is important to categorise all financial goals in two segments: (a) Wealth creation, and (b) Needs Management. Investments for wealth creation must be done with a mindset that it’s holding time is forever. Need based investments can have a short term and long term holding time.
Part #3: Selection of right investment vehicles is the heart of all investment plan. How to select the best vehicle? It shall not be done based on ‘potential returns‘. It must be based on the available time horizons. Short term goals will need different set of investment options compared to long term goals.
I hope this article adds value to your existing understanding of investment. Please consider sharing your opinion in the comment section below.
Have a happy investing.