Starting a business is a tough enough job if you have left your job. With little financial help from external sources, often entrepreneurs start the business with some small seed capital of their own and then aim to fund the development of their company through internal cash flows. Expenses are closely monitored, while cash is always short in supply.
However, the current situation of your startup has no bearing on what route your personal financial planning needs to take. Our personal finances need to be in ship-shape so that we are able to focus on our professional pursuits. Here are a few investment avenues you should consider while investing.
Bootstrapping your startup definitely means that you have put in a lot of your own money at stake. Typically, money for a business means working capital, which helps run the show on a day to day basis. For your own personal needs too, you will need liquidity. Instead of blocking your money in investment avenues that have lock-ins, it is important for you to set aside some money in debt funds.
Debt funds are comparable to bank deposits, but are more tax-efficient and also have potential to generate better returns. With ATM cards now being linked to debt funds, you can use them to withdraw money at any time through the day. If you don't have such a card, debt fund redemption requests can take 2-30 minutes and the money comes directly to your bank accounts.
Liquid funds typically generate 0.25-0.5% more than bank FDs. Debt funds are clearly much better than keeping idle money in saving bank accounts, which offer 3-4% interest only.
Startup phase is one where money may be required in regular doses. Unless there is an external source or investor, you may have to personally fund the business till it becomes self-sustainable. Balanced funds can help you grow your money if you have more than 2-3 years to spare. Since balanced funds invest in equity and debt assets, it scores higher on principal protection aspect compared to pure equity funds.
The debt portion of the fund works like an anchor, navigating rough seas of stock markets when there is volatility. Your business may require money in 2-3 regular intervals and you can tap into balanced funds to generate some additional capital. Use systematic withdrawal plans (SWPs) in getting frequent cash flows if you are tapping funding corpus every other month.
Do remember that long-term capital gains of over Rs 1 lakh per year are now taxable at 10%. SWPs can come in very handy in such cases.
While your personal needs of investing and financial planning are important, it is crucial that you do not mix business and personal needs. For example, investments in the business/startup must come from internal accruals and money generated from the business. On the other hand, investment for your own personal finance must come from your sources.
If you have set aside an emergency fund for the business, do not use money lying there for your own investments. A startup emergency fund is for your business. Using that money for your own use can expose your business to a dangerous situation where it can face a shortfall in the event the enterprise needs money quickly.
If you have a large amount of money, do not put that cash into an illiquid asset. Many a time, entrepreneurs make the cardinal mistake of investing in avenues where liquidity is scarce. Investing in real estate or property may make sense in the long-run, but investing for 1-5 years is harakiri.
Property prices do not move up much in short cycles, and the costlier the property, the more difficult it is to get a buyer. If you need money in a quick time, real estate is not the place to be since the transaction process often can take months to be completed. While gold jewelry is often an avenue for women to store money, entrepreneurs should not adopt the same route.
While gold's role as a portfolio diversification tool is well-accepted, gold as an asset in unproductive because there is no real use of gold beyond jewelry and some investment. Gold prices are influenced by demand and supply only.
Investments have their own sacred place in our lives. Entrepreneurs should not forget to invest for themselves. You may be passionate about your startup idea and a fledgling business, but that should not stop you from investing money smartly for your family and personal uses. In fact, one can argue that if an entrepreneur has well-managed personal investments, she/he is more likely to succeed as a businessperson. Invest money in avenues that strike a harmony between risk and return, and allow easier withdrawals.