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You may be a little late to the party, but the party has just started. The best time to started looking seriously into your investments would've been in your early 20s when you may have just started to earn your first payment, but you are not too late in your 30s yet. According to a recent poll, only 1 in 4 Americans start investing seriously before the age of 30, and the numbers are meeker here in India. What's stopping you from starting now?
What are my pre-requisites before I start investing?
1) Ensure you have an insurance plan covered
If you haven't opted for a life insurance plan yet, check out this article to understand why it is really important to have one, and how to decide on one. To summarize, you are likely to be at an age where there may be multiple people depending on you as the provider in the family, from your children and spouse to your parents. To ensure that your family does not suffer adversely in case of your unfortunate death, insure yourself with a life insurance contract from a trusted company.
2) Pay off any high-interest loans
In our article "Five tips to follow before you invest in your twenties", we spoke about the ideal case of having no pending loans whatsoever. However, it may be difficult to be in that luxury in your 30s, with multiple expenses like a vehicle loan, mortgage loan, education loan, etc that you cannot afford to be frugal on like you could in your 20s.
As a result, try to be in a situation where you can quickly pay off your 'high-interest loans' at least. These loans include personal loans, credit card outstandings, etc. These 'high-interest loans' could eat into any returns you are making, and make it highly difficult for you to manage your finances as it is. You would want to be as financially secure as possible before taking a plunge into serious long-term investing.
3) Ensure you have an emergency fund
Having rainy-day savings ensures that you will have capital kept aside in case of extreme scenarios where even any insurance contracts you've bought and kept will be unable to help out. Have an emergency cash reserve for any unexpected contingency that may come that should ideally be around 3-4 times your yearly salary at least.
4) Explore low-risk investment options
You cannot afford to take the risks today that you could have taken in your twenties. For example, you cannot put large amounts of your capital into small-cap and medium-cap individual stocks. You'll need to use safer routes of investment - ones that can provide a decent guaranteed return over the next few years. Like
- Public Provident Fund (PPF) - This is a government-mandated investment plan that is backed up with guaranteed returns for the invested capital. Although funds invested in the PPF account cannot be liquidated until the end of the 15 year maturation period, the gains on this investment will be 100% tax-free. You can invest a maximum amount of 1.5 lakh rupees per annum over this duration. If you can sincerely invest this 1.5 lakh rupee every year without fail, you can earn 40 lakhs worth of tax-free money that was earned against inflation!
- National Pension Scheme (NPS) - open to all employees from the public, private, and unorganized sectors except the armed forces, the NPS is one of the most popular investment products across the country. A portion of your capital in this scheme goes into investments and it can generate you a return of around 9-12% every year investing in stocks and bonds. However, there is a lockup period for these funds till the age of 60 and withdrawals can be made only 3 times on a 5-year basis. Even after retirement, the entire capital is not available for withdrawal, as it is mandatory to keep 40% of the NPS capital in the scheme. The biggest advantage is the flexibility of the amount that can be potentially invested, with the minimum amount as 6000 rupees per year.
5) Begin a Systematic Investment Plan (SIP)
SIPs are a neat plan to take away the human bias in the investing process. A SIP is the easiest way to create wealth over the long term where the question of "when to invest" is removed by the discipline of investing at a particular time every month.
If you can invest 10,000 rupees a month for the next 15 years; your total investment will have added up to 18 lakh rupees by now - 1.2 lakhs annually. After this 15 year duration, your returns could be worth over Rs 50 lakh - a massive return on your monthly investments of just 10,000 rupees.
6) Real estate
If you own an apartment flat, a piece of residential or commercial land, that too can act as a solid investment vehicle for many years. Real estate is considered as one of those investments that rarely depreciates, and can shoot up in value over a large time period. Besides, you can always generate a comfortable source of passive income by renting out your property or commercial space.
However, real estate as an investment for the sake of investment can be inconvenient, as it is highly illiquid i.e. you cannot get money in and out easily. If this could be an issue for you, it's useful to consider Real Estate Investment Trusts (REITs) - similar to stocks, REITs are small shares of a larger property that you can buy and sell easily with your broker in the stock market, just like you would with companies. REITs are also managed by qualified professionals who will look after the property you own concerning constant maintenance and renovation to ensure that your investment in real estate will not get messy and complicated so that your only job as a REIT investor is to hold the shares as they appreciate.