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Money management heuristics for retail investors

  1. Real Estate :
    If from the middle class background, do not invest in real estate apart from the primary residence. Purchase house only if you want to live in it and you can afford it.

    Home Loan EMI affordability : Less than 30% of in-hand income or 20% of joint in-hand income.
    House cost affordability : Home loan affordability + down-payment you can make 
  2. Emergency Fund :
    6 to 12 months living expenses including rent and EMI
     
  3. Car cost affordability :
    5 times monthly in-hand income
     
  4. Life insurance :
    12 to 15 times annual income.
    Use term insurance, take term till age 60, avoid riders.
    Do not mix insurance and investment.
     
  5. Health insurance :
    5 lac basic health insurance cover + minimum 20 lac super top-up cover.
    Ideally both policies from the same insurer.
    Prefer health insurance polices with no room rent sub-limit.
     
  6. Accidental/Disability insurance :
    10 times annual income
     
  7. Equity :
    If you don’t have the interest, aptitude, and time required for successful stock investing (i.e. beating Index Fund return over the long term), avoid stocks.
    Keep demat and trading account with banks and not brokers. Safety is more important than lower brokerage.
    Use Index Funds and Multicap Funds for equity allocation.
    Up to 20% allocation can be taken in Midcap Funds (but this is not a necessity).
    Avoid Smallcap Funds, Sector Funds, and PMS schemes.
    20% to 30% of equity portfolio can be kept in foreign stocks to reduce country specific risk.
    There is no reliable method to find the highest return generating funds of the future.
    Return expectation from equity : 3% to 7% real return (return over inflation). Anything above 7% is over-optimism.
  8. Debt :
    Use debt part of the portfolio to provide stability to the portfolio, not to generate a higher return.
    Keep credit risk and interest rate risk minimum in debt part of the portfolio.
    Make optimum use EPF, PPF and SSY in debt part of the long-term portfolio.

    Prefer debt funds that invest the majority of money in SOV, AAA and A1+ rated papers.
    Do not use debt funds where average maturity is higher than the time you want to keep money for.
    Prefer debt funds of bigger AMCs.
    Never keep money in Co-operative Banks.
     
  9. Asset Allocation :
    If not a full time or professional investor, do not go beyond 60% equity in long-term portfolio. Slowly reduce equity allocation as you approach retirement. Do not keep over 40% equity allocation post retirement.
    Avoid equity for short-term goals.
    Keep any amount required for short-term and recurring goals in Liquid Funds, recurring deposits, or fixed deposits; redeem as and when required.
     
  10. Retirement Corpus :
    If ‘X ‘ is the annual expense in the first year of retirement and comfortable with 20% to 40% equity allocation in the retirement portfolio,

    retirement corpus required for 20 years in retirement = 20X
    for 25 years in retirement = 24X
    for 30 years in retirement = 27X
    for 35 years in retirement = 30X
    for 40 years in retirement = 32X
    for 45 years in retirement = 34X
    for 50 years in retirement = 37X

    If negligible equity allocation in the retirement portfolio, r
    etirement corpus required = X*years in retirement

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