Savings Net; A Financial Backbone

Vyomika, an investing geek, ticked the foundational or protection layer of the financial pyramid at her early age of 24.
Emergency Fund? Done.
Health Insurance? Done.
Term-life Insurance? Done

Vyomika took pride in herself after adding these crucial layers in her financial portfolio while her friends had not even started. Now being an investing geek, this is a time to invest and grow her money to get out from her job which she considered as a so-called ‘rat race’ as early as possible.

She dreamt of having her own cute co-working cafe where people could come and discuss their future plans, brainstorm new startup ideas, she imagined a peaceful place where people could focus on their work with their peak productivity. Since she’s been passionate about hospitality, she is excited to invest her money and let it grow to have enough to fund her venture.

Without a second thought, she directly jumped into investing and poured all the savings she had and started large SIPs into equity mutual funds, fancy cryptos and a few trending stocks. And here this investing geek made a mistake.

Vyomika skipped a financial layer of debt investments which acts as a cushion between protection layer and growth. Though those debt instruments such as Fixed Deposits (FD) and Public Provident Fund (PPF) sound boring and do not give the thrill, they are very important while building a strong financial pyramid. Let’s find out where Vyomika realised this terrible mistake.

Vyomika’s investments grew significantly and she felt like things were going according to the plan. She left her job to set up the cafe, she withdrew a lump sum amount from her investment and kept the rest invested to fulfil the other future costs.

But the market has its own madness, the global factors made her equity investments lose nearly 40 percent of their value at the time when she desperately needed the money to pay rent, salaries etc. Her emergency fund could only cover her own lifestyle expenses for 6 months and her investments all locked in, too risky to touch without losing money.

She was stuck. No funds. Panic mode on.

Here’s a key lesson, after you protect yourself by building the foundational layer of the financial pyramid, you do not need to jump directly into investments. Instead, a growth and protection layer shall be built simultaneously, one portion should be allocated towards savings and another portion should be put in investments. With a long-term horizon these funds will drive you towards financial security.

In this blog let’s learn the basics of protection layer and how to build it.

Why Debt Investments?

Savings in the debt instruments such as FDs, PPFs, Endowment Plans ensure access to liquidity, safe assets and regular income. They are seatbelts in the financial journey. These instruments provide stable returns, suitable for conservative times and are safer than equities. Savings might not give you thrill but they will surely give you freedom.

Types Of Debt Investments

Fixed Deposits (FDs)

When you hear the word FDs, the first thought you get is FDs erode the value of money because of inflation. However, FDs are not invented to make you rich, they exist for other purposes. FD ensures the safe growth of your money while its returns are at par with inflation rate. Now we also have an alternative of FDs in the form of debt mutual funds which you can easily access on MINTIT. Safe and simple. MINTIT, India’s only dedicated Mutual Fund Platform caters to your personalised goals and accompanies you to achieve your financial milestones. With its personalised plan, MINTIT helps you to build the complete financial pyramid under experts’ advice.

Public Provident Fund (PPF)

PPF is a government-backed long-term savings plan to help you build your funds for retirement. The tenure is usually 15 years and can be extended by 5 years on maturity. It provides a fixed return of 7% to 8% per annum which is eligible for tax deduction under section 80 C. The risk here is very low or negligible, however the liquidity is also low which means it is difficult to withdraw before maturity. Although this lock-in is a positive feature which ensures that you would be left with a corpus for your retirement.

Endowment Plan

An Endowment Plan is a product which gives the benefit of savings along with the insurance. This complimentary benefit provides you with insurance, and upon maturity it provides you a lump sum amount with 4% to 6% returns. For example, LIC New Endowment Plan, HDFC Life Sanchay Plus, SBI Life Smart Money Back Gold etc.

Benefits Of Debt Investment For Savings Net

Debt investments are a crucial part of a balanced portfolio and it should be crafted carefully at the right time. To tolerate financial volatility, generate predictable income with lowest risk and most importantly, to have a peace of mind when people panic, savings in debt instruments is a perfect way. The confusion occurs when people confuse savings with investments and make wrong decisions compromising their financial well-being. These funds strive on their size not on their returns. On the other hand, it is very crucial to not ignore the investments completely and get lost in building a savings cushion. Both the instruments should be built side by side with a long-term horizon to enjoy fruitful returns.