What are the things every middle-class salaried Indian should consider before investing in mutual funds for the first time?

You’ve hit upon one of my favourite investment strategies: LSG – Liquidity, Safety, and Growth. A beautiful symphony, if played right, can hit all the right notes for our middle-class, salaried compatriots. Let’s have a relook at our plan, but this time through the LSG lens:

1. Defining Financial Goals and Asset Allocation: Like a maestro who begins a symphony with a clear composition in mind, start by defining your financial goals. Different goals require different tunes, or rather, different investment strategies. This is where LSG helps in tuning the asset allocation – deciding how much to put into liquidity-oriented, safety-oriented, and growth-oriented investments.
2. Understanding Risk Tolerance – The Safety Aspect: As a salaried individual, your ‘Safety’ score on the LSG chart might be quite high. This score determines your risk tolerance – the level of uncertainty in returns that you can bear. Higher risk usually brings potential for higher returns but also greater short-term fluctuations. A cautious investor might choose balanced or debt funds, whereas a risk-taker might opt for equity funds.
3. Creating an Emergency Fund – The Liquidity Aspect: The ‘Liquidity’ part of LSG is the financial parachute you hope you’ll never need, but should always have. This fund should ideally cover 3-6 months of living expenses. Remember, this is not the money you should be investing, it’s the one that ensures you have a roof over your head and food on your table, even on rainy days.
4. Budgeting for Investments – The Growth Aspect: You’ve paid the bills, created an emergency fund, and now you’re thinking, ‘Is there enough left to invest?’. That’s where the ‘Growth’ component of LSG comes in. Mutual funds allow you to start small and grow big through Systematic Investment Plans (SIPs). They make investment a habit rather than an afterthought.
5. Reviewing Fund Performance: The mutual fund’s performance is like the music sheet for our symphony. Review past performances, but remember that they are historical notes and may not predict future tunes. The reputation of the fund house and the consistency of the fund manager should also factor into your decision.
6. Diversification – The LSG Symphony: Spreading your investments across various asset classes and sectors is like composing a symphony with different instruments. Each plays its own unique tune, yet together they create a harmonious whole. This diversification can help balance the risks and rewards, contributing to a more stable financial symphony.
7. Understanding Tax Implications: Different instruments, or investments, come with their unique tax implications. For example, Equity Linked Saving Scheme (ELSS) provides tax benefits under Section 80C, whereas returns from debt funds get added to your taxable income.

So, dear middle-class, salaried maestros, remember that your investment symphony, although it may seem complex, is a masterpiece waiting to be composed. And with the LSG strategy, you have a robust framework to guide your investment composition!