Question: Me and my wife are doing well in US and in the meantime we are trying to set some financial goals for ourselves and have been doing some research to achieve them.
In our present situation, we are interested in mutual fund investments in the US and were wondering if you could suggest any mutual funds with no or low loads and minimal investments of $ 150 per month. We just want to give it a start no matter how small the amounts. Any suggestions will be appreciated.
Mr. Gerard Colaco: It is good that you are thinking of mutual fund investments in the US. As your earnings increase, you must move towards having investments in India too. Let me now deal with investments in the US.
I would advice you to start with only one mutual fund for all your requirements and that is Vanguard Mutual Fund. Vanguard is in my opinion and the opinion of most other financial advisers, simply the best mutual fund in the world, from the point of view of investors.
You can start with a recurring investment plan into the Vanguard Total Stock Market Index Fund, which is more than enough for your equity investments in the US. It is equal to investing in the entire US stock market at the lowest possible cost.
Later on you can also start recurring investments into the Vanguard Total Bond Market Index Fund and The Vanguard REIT Index Fund. The fourth important avenue of investment that you must look at is in TIPS, that is Treasury Inflation Protected Securities. These are inflation indexed bonds issued by the US treasury. The principal is adjusted to the consumer price index (CPI), the most commonly used measure of inflation.
The coupon rate of TIPS is constant, but generates a different amount of interest when multiplied by the inflation adjusted principal, thus protecting the holder against inflation. TIPS are presently offered in 5, 10 and 30 year maturities.
A day will come when between the two of you, you will be able to save at least a $ 1000 a month. At that time, your investment must be into an asset allocation program that looks something like this;
Total Stock Market Index Fund : 50%
Total Bond Market Index Fund : 10%
Total REIT Index Fund : 10%
TIPS : 30%
This will ensure that you follow the classic 60:40 asset allocation plan between growth and debt investments. In fact, the 30 percent allocation to TIPS will provide you with adequate hedge against inflation and stability to you portfolio.
TIPS can be purchased directly from the US treasury. Go to www.treasury.gov When the page downloads, locate the section “Common Questions” and click on “How do I buy and managed savings bonds and securities”. When a new page loads, go to the section ‘Individuals’ on the left hand side. Under this section you have detailed information about a facility called “Treasury Direct”.
Locate the section “Welcome to Treasury Direct” and click on “Buy securities in Treasury Direct”. In fact, the Treasury Direct page gives you a host of information, tools and forms about investing in TIPS, among other products. Do not go for any securities other than TIPS in the government-securities class.
Since you were excellent student in my class, let me also advise you that financial planning is very important for you even in the US. Therefore, ensure that you have adequate health insurance for both of you and build emergency fund preferably in a money market account with Vanguard, targeting one year’s normal living expenses. An emergency fund can be built over a period of time, say three years. I am assuming that both of you will be working and earning money.
One more piece of advice I have to give you is not to neglect tax work right from the beginning. Please note that, you have a multi-layered system of income-tax in the US. You have the federal income-tax, the state income-tax and the local muncipal tax.
One good, brief and easy full of practical advice that you can read about personal finance and investment in the US is ” The Little Book of Safe Money” by Jason Zweig. This is an easy read and is well worth purchasing. One more excellent book is ” The Elements of Investing” by Burton Malkiel & Charles D Ellis.