WITH the employment market flush with wellpaying jobs, it's not uncommon to see youngsters taking home hefty pay packets these days. While sky seems to be the limit for disposable incomes, the major chunk goes into spending rather than investing. Many are missing out on the economic boom in the country due to the inability to recognise the importance of investing or due to lack of knowledge.

Take, for instance, Sandeep Kamat, a 25-year-old executive working with an MNC insurer. While he takes home a princely Rs 38,000 per month, he has made absolutely no provisions for channelising these funds towards right investment avenues. Despite not taking any action now, he hopes to buy a house of his own in a plush locality - which could cost around Rs 70 lakh - in the next five years.

Considering that he has no dependants and comfortably manages to save a sum of Rs 20,000 every month, after allocating Rs 18,000 for family and personal expenses, he would have been able to reap rich returns had he invested this amount in the markets till now. That would have helped him a great deal in his quest for acquiring his dream house. But as they say, better late than never. Experts say even if he starts investing now, he can save enough in the next five years to fund his aspirations.

Says Kartik Jhaveri, director of financial planning firm Transcend India: "Since he is capable of investing Rs 2,40,000 every year and has no dependants, his only objective should be to create wealth. There needn't be any other primary or secondary objective. Also, he needn't worry about volatility in the markets as he can afford to take risks."

According to him, Sandeep should consider investing directly in equities, as the best way to earn money is to invest in stock markets. If he cannot do so, then he can go for equityoriented mutual funds. "To avail of tax exemptions under section 80C, he can invest Rs 1,00,000 in Equity Linked Saving Schemes (ELSS) through SIP (systematic investment plan). ELSS falls under the category of diversified equity investments. Hence, opting for such schemes would ensure he achieves the dual objectives of obtaining tax benefits as well as making highly productive investments," he reasons.

This tranche of Rs 1 lakh forms about 40% of the investible surplus. "Out of the remaining, 30% of the funds can be invested in mid-cap funds and the balance 30% can go towards sector-based equity funds like power, infrastructure and the like," advises Mr Jhaveri. Given this portfolio, Sandeep can achieve his objective of saving enough in the next five years to fund the down payment of a property worth Rs 70 lakh. "If he gets a return of 20% per annum over the next five years, he would have Rs 20 lakh in his kitty by the end of that period. If the investment yields a return of 15% pa, he would have Rs 18 lakh, and in the worst case scenario, if the portfolio generates a mere 10%-pa return, he would still have about Rs 15.5 lakh," explains Mr Jhaveri.

Adds Akhilesh Tilotia, director, Park Financial Advisors: "In the next five years, apart from buying a property, he might plan to get married as well, and would thus have to set aside some more money, say an additional Rs 5-10 lakh, for the purpose. He can consider adding instruments that carry relatively lesser risk to his portfolio in order to provide the right balance."

If Sandeep intends to save for his marriage and property, he would need Rs 20-25 lakh - marriage expenses plus down payment - at the end of five years. Mr Tilotia recommends a portfolio made up of equity funds and low-risk instruments like fixed deposits and longer tenure debt mutual funds in the ratio of 2:1. Such a mix, he believes, would be ideal for saving enough to fulfil Sandeep's objectives.

An important point that you need to bear in mind is that financial plans need to be reviewed periodically. So, Sandeep can choose from these solutions. And you can take a cue from what the experts have recommended for him. If your income level and aspirations are alike, you can resolve to start investing on similar lines now. After all, is there a better time than the New Year to put such important financial resolutions in motion?

As you can see, the loss in this case is a product of his action of buying shares and the accidental fall in the market. In short, our actions and accidents are often intertwined.

Accidents are not under our control, whereas our actions are. However, the intertwining of our actions and accidents, contributing a risk, confuses us in managing the risk.

Risks arising purely as the result of accidents can be managed, perhaps, by insurance. However, there are other risks that can be managed without the help of insurance. In order to manage the risk successfully, we must study the nature of risk.

For example, a person decides to manufacture cloth. Then he finds that the price of the cloth is linked to the price of cotton, which is highly influenced by the vagaries of the nature. There is a time gap between procurement of cotton and final sale of cloth made out of it. It is likely that when he buys cotton, the prices are low. When he has finished the manufacture of cloth, the prices of cotton have gone up. It will take push the prices of finished cloth higher. He stands to gain on account of such price fluctuations.

This gain is speculative. We call it speculative because the person hasn’t done anything to cause the accrual. In a reverse situation, he may have suffered losses. In either case, if he has taken a conscious decision to bear the risk, he may have left the risk uncovered. However, if he decides that he want profits only from value-addition made from manufacturing activity and do not want to suffer speculative losses, he may decide to manage the risk. If the cost of input is fixed, he can enter into a forward contract to sell the cloth to be manufactured in the future at a predetermined price.

It is likely that when the cloth is actually manufactured its spot price in the market is higher than the predetermined price. However, what he would lose here is a speculative profit. If the price had fallen, he would have been insulated by the forward contract. However, if there is a change in public taste in the period during which the production of cloth was underway and as a result of this change the prices of cloth fall drastically, the loss is due to an accident which was almost uncontrollable. Thus, risks arising due to controllable events can be managed by some action other than insurance.
Other risks can be managed through insurance, if available, and sometimes with a little foresight.

What all this boils down to is this: Identify the areas of risk. Decide which risks are purely due to events that are uncontrollable. Insure such risk, if possible. The rest of the risks arise due to controllable events. Decide which risks out of such controllable events you want to bear. The rest can be managed through some counter action.

Resolution No 1:
I will be more serious about my finances

Most of us live from pay cheque to pay cheque. This is irrespective of the fact that people are actually taking home huge pay cheques, unimaginable ten years ago. Hard to believe? Why would well earning people wait for the next pay cheque half way through the month? According to financial planners, irrespective of the pay, most people’s finances are in a mess.

This could be due to reckless spending or propensity to accumulate debt or pure lack of financial discipline among other things. They point out that most people seem to believe that they would earn pay cheques for their entire life. Sadly, that is not possible. Hence the resolution of becoming more serious about finances. Don’t postpone the event.

Act right away. Take stock of your financial health. In case you find it difficult to do it yourself, seek professional help of a qualified and experienced financial advisor. Draw up financial plans that would help you achieve your various life goals.

Resolution 2:
I will have a repayment programme to pay back my debt

Credit has become a way of life for us these days. We don’t flinch while flashing a credit card to buy things even when we don’t have enough money in our bank account. A loan to buy a car or a fancy electronic gadget is as common as buying a cup of coffee.

Why wait when you can have it even when you don’t have the money seems to be the mantra. No wonder, financial advisors treat the C word (or credit) with a certain disdain. They believe that most people don’t know the real implications of debt could have on their life. Paying off minimum amount due in a credit card or an equated monthly installment doesn’t really scare most of us.

But if we pause to look at the quantum of interest or how much of our income is going towards repayment of debt, we would get a real picture. That is they want us to classify our debt depending on the interest rate. Your priority should be to pay the most expensive credit, which most likely to be your credit card outstanding. Also, continue with your equated monthly installments. By the way, you don’t have to fret about your housing loan, as it is considered a good credit.

Resolution No 3:
I will buy insurance cover

The tendency to build up credit is likely to have an adverse impact on the lives of our dependence.

This is because in the unfortunate event of the death of the breadwinner, all the accumulated credits are likely to eat into whatever savings or assets the dependants can fall back on. This is because the dependents would be forced to repay some of the credit. The only way to safeguard against such a misfortune is buy “adequate’’ insurance cover. And don’t limit it to only life cover. You should also try to have a health insurance cover. Also, try to get your house and household articles insured.

The idea is to make sure that you are prepared to face any eventuality. In case of a sudden illness or damage due to nature’s fury, you are well prepared to face any such eventuality, and your financial plan would always remain on track.

Resolution No 4:
I will have a retirement plan

India’s boomers are likely to face a harsh reality in future. Most boomers are so obsessed with earning more and spending more that they are oblivious to the fact that they would stop earning those pay cheques one day.

Unlike their parents, who steadfastly penny pinched their way to a peaceful retirement, these boomers are likely to be miserable. This is because the parents didn’t have an extravagant lifestyle, they had kids or relatives to fall back on. Also, times were different. That is exactly why you should have a retirement plan in place. Always remember the secret behind a successful retirement plan is to start early with a small amount and stick to the plan with determination. Also, take the help of the stock market to build a substantial corpus. Stocks always deliver in the long term.

If you are not familiar with the market or don’t have enough time to devote, then opt for a equity mutual fund scheme. You can invest small amounts in a mutual fund scheme, and the mutual fund manager would take care of investing your money.

Resolution No 5:
I’ll not chase fads in the market

Last one, but treat it more seriously. Most investors lose their money and a chance to create wealth by following the fads in the market. They flock to the stock market when the market is doing well. A sign of a decline, and they pull out the money and head to the bank to make a fixed deposit.

They would pull out money from a performing stock, and put it in an IPO because everybody is talking about making money from IPOs.

Similarly, they would redeem units of existing mutual funds and invest the money in a new fund offer because everyone is doing it. Pause and find out the reasons behind a particular trend in the market. Does it make any sense to you? Only if you are fully convinced of the logic, follow the herd.

However, since the database so far only contains some 75,000-80,000 names, it is still not available online. Life insurance companies submit the data on a monthly basis. When the company has a doubt about a certain individual, it calls Tariff Advisory Committee to run a check on the person’s details. Since the database also captures the reason a customer has been declined a policy, the company can decide whether it too wants to reject the customer or offer a policy at a differential price.
“The database is now being used more frequently and we expect that as the number of policies sold goes up, the data will increase and we’ll make it available online,’’ says Life Insurance Council secretary general, S V Mony.

Mony also added that there are about nine frequent reasons for a company declining a cover to a customer. The most common reason is due to a company’s underwriting guidelines, for instance, one company may have a different acceptable body mass index for a person and reject the customer if he/she does not fall under the acceptable limits.

Mony adds that this will allow companies to assess pricing and risks better. “It wouldn’t make sense for a customer to lie about being rejected earlier or lie about his/her health conditions because there is a way companies can keep track of bad risks,’’ he says.