By the time you read this article, most Indians will be celebrating "Bhai-Dooj"—observed on the last day of the five-day Diwali festival.

According to a popular legend in Hindu mythology, after slaying the evil demon Narkasur, Lord Krishna visited his sister Subhadra who gave him a warm welcome with sweets and flowers. She also affectionately applied a tilak on his forehead. Some believe this to be the origin of the festival. The whole ceremony signifies the duty of a brother to protect his sister, as well as a sister's blessings for her brother.

Amidst all the diya lights, fireworks, crackers, and revelry, the one thing common is to give cash-gifts to youngsters as blessings. These days elders dole out more cash-gifts than they did earlier. A decrease in the purchasing power of money may be one of the reasons. Festivals are a great source of pocket money, aren't they?

But, let us dive a little deeper…

What do you do with the money? If you are like most individuals, spending it is the preference.

But as a prudent investor, wouldn't you want to know how to ensure investing the Diwali Cash wisely?

In today's issue, we'll share how you can put this money to productive use to fulfill your financial goals…
 

1. Equity—the multiplier: Even if you get small sums of money, make sure you invest it. An early start to investing will help you accumulate more—in short, the early bird gets a bigger pie. Suppose you invest the Rs 5,000 gift from your aunt, in equity, through mutual funds, potentially you would/could earn a return of 15 per cent a year. And can you guess how much your investment would be worth after 10 years? Well, you would fetch Rs 20,228 i.e. four times your initial investment. Isn't that great?
    
2. Liquid Mutual Fund—to serve your short-term needs: Investing in a diversified equity mutual fund is the best option for long term goals. However, if you are unaware where you should be investing your money or want to invest for the short-term, liquid funds could be the answer. Alternatively, you may also park some money in your savings bank account.
    
3. Debt—to earn regular returns: Countless individuals prefer investing their hard-earned money in fixed deposits irrespective of the time frame of their financial goal. But actually, you have plenty of options: PPF, Fixed Deposits, Debt Mutual Fund, Corporate Fixed Deposits, etc.; so choose wisely.
   
   Now to park your hard-earned money amongst these asset classes, follow a simple rule:
     100 – Your Age = Equity
   
   So, say your age is 25, 75% of your Diwali Cash should go in equity, and the rest i.e. 25% should be in debt. Similarly, if your age is 35, invest 65% in equities and 30% in debt and so on. Although a crude measure, this thumb rule helps you diversify your investments to some extent.
    
4. Gold—The saviour: The precious yellow exhibits trait of being a safe haven during economic uncertainty. It acts as hedge, a saviour when everything goes topsy-turvy. And in India we have an insatiable appetite to hold gold. Indians love gold; in fact are gold bugs. But against popular belief, the reality is it doesn't offer exponential returns. Whether you are just starting-off, make sure you don't invest more than 5% of your investible surplus in gold. Apart from being a hedge, it can help you diversify your portfolio and preserve the value of your hard-earned money. But remember, it may not help you with a regular flow of income.

 

Golden Rules for Investing   Just investing your savings is not enough. What's important is invest wisely, as inflation reduces the purchasing power of your money. So, make productive investments, which can counter inflation better and create wealth for you to meet your long term financial goals.   Know the pros and cons of the asset class before investing. Don't invest in an ad-hoc manner. It may be unhealthy for your long-term financial well-being.   Less risky assets may be unable to beat the inflation rate. So to earn positive real rate of return, asset allocation and portfolio diversification are necessary.   Equity has potential to generate high returns in the long term. Please note that, even though equity will show some volatility in the short term, in the long term it may counter the inflation rate and potentially give you a better positive real rate of return.   Debt investing can help you earn regular income. Keep in mind, not all debt investments are safe.   Gold is considered a hedge against inflation. It will preserve the value of your hard-earned money, but may not offer you any flow of income.

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