Last week, Apple launched the latest version of its popular phones, iPhone 7 and 7 Plus. Apple fans and sceptics alike are buzzing about the various improvements in the phone. It is also likely to debut in India sooner than the earlier iPhone models, and the price of the base model is expected to be upwards of Rs 60,000, or around $900.
Buying this new gadget for yourself will bring you marginal utility: you will love the novelty of a new toy and enjoy the many technical improvements in the phone. It will also bring you the acknowledgement of your peers who may rate you favourably for your taste in technology.
But let’s discuss this purchase speaking purely from an investment point of view.
It could be said that there are many smarter things you could do with that money. A cellphone, like every electronic item in your possession, is a depreciating asset: its monetary value will start sliding down a greasy pole the moment you purchase it. If you try to resell it after a few years of use, it will fetch you only a small fraction of its original cost. (Hold that thought for a real-time example of iPhone 5s mentioned below.)
This works out exactly the opposite of creating wealth by investing in an appreciating asset, purchasing an insurance which protects you from monetary losses, or repaying a loan which reduces your liabilities and thus boosts your net worth.
Let’s take a quick look at some smart moves you can make with Rs 60,000—especially if you haven’t done them already.
BUY A LIFE COVER
If you’re a 30-year-old salaried person earning Rs 500,000 annually, you could get a term insurance plan of Rs 1 crore (that’s 20 times your income) for an annual premium of around Rs. 10,000. It still leaves you with plenty of money to purchase just about any top-rated smartphone in the market. Not only can you still buy a good phone, you would also secure the long-term finances of your dependents with your term cover in case of your untimely death.
BUY A HEALTH COVER—FOR YOUR WHOLE FAMILY
Buying health insurance should be a priority on the same level as paying rent or buying food. Everyone needs it. A 30-year-old salaried male can buy a health cover of Rs 500,000 for himself, spouse and one child for an annual premium around Rs 12,000. If the same person has dependent parents who are, for example, in their fifties, he can buy them a similar health cover for an annual premium around Rs 30,000. Buying those two covers for your family still leaves you with change for further investments.
BUY MUTUAL FUNDS
This has been a good year for Indian investors. There’s a positive feel to the Indian economy and most market indices are at their peak. Many institutional investors believe that India’s greatest bull run lies ahead of us. So why not pose faith in the markets and buy some mutual funds? Consider the performances of some of the best-performing funds at the moment. An investment of Rs 60,000 five years ago in a large cap fund such as Kotak Select Focus Fund would have returned you nearly Rs 1,51,000 this week. A similar investment in a small and mid-cap fund such as BlackRock Micro Cap Fund would have returned you a whopping Rs 2,01,000 this week—enough money to keep growing your wealth while sparing plenty for you to buy literally any phone in the market. Now, consider the flipside: an iPhone 5s, which debuted in India late in 2013 for a price around Rs 54,000 is now priced around Rs 20,000. So which of these options seem more attractive now?
If you’re a risk taker looking to create wealth for himself, one of the best ways to do it is by purchasing equity. This, however, needs careful evaluation of a company’s financial records. You could stick to bluechip companies and minimize your risks while ascertaining steady long-term appreciation. For example, five years ago, you could have purchased 8 shares of MRF with Rs 56,000. And that investment would have been worth Rs 3,20,000 this morning.
PAY OFF YOUR LOAN
With a pre-payment of Rs 60,000, you could make a sizeable dent on your outstanding loan amount. Let’s assume you have borrowed Rs 3,000,000 at the rate of 9.4 per cent for 20 years. Your EMI is Rs 27,768. Assume that you have paid 24 EMIs. At the start of your loan, you were paying Rs 4,268 as principal. But after 24 payments, that amount has risen to only Rs. 5,147. Assume that you were now to make a pre-payment of Rs. 60,000. This straightaway reduces 11 EMIs from your loan, whose total value is approximately Rs 3,05,000, saving you nearly Rs. 245,000 in the long run. It also raises your monthly principal payments to Rs 5,657—a number you would not have reached for another 12 months without the pre-payment. TL; DR—the pre-payment will ensure significant short and long-term savings for you, freeing up your income to pursue a lifestyle of a higher quality.
If market-linked ups and downs aren’t for you, go safe. There are plenty of conservative options to grow your money. Fixed deposits would offer you rates between 7-8 per cent. Public Provident Fund offers 8.1 per cent currently, while increasing payments to your Employee Provident Fund would return you 8.7 per cent an annum. You could also buy top rated government and corporate bonds, National Savings Certificates, etc. all of which would pay you in the range of 8% with lock-in periods of varying length.
To build long-term wealth, you must invest more and splurge less. Make sure your investment and insurance basics are looked after first, that your loans are paid off on priority, and only then should you spend on lifestyle upgrades.
The author is CEO, BankBazaar.com