Term Of The Week: Nest Egg

By BankBazaar | November 7, 2016

term-of-the-week_nest-egg

Is a ‘nest egg’ your ‘stash’? Yes. Is it your savings? Yes. Is it your Investments? Yes. Does it have anything to do with the eggs that you eat? Yes. But how can it be so many things at the same time? Let us explain.

A nest egg is a term that has been in existence since the 17th century. It used to refer to eggs in a poultry farm. Apparently, farmers used to place real as well as fake eggs in a hen’s nest. It was expected that the hen would lay more eggs after noticing the eggs in the nest. This was one of the methods farmers used to increase their income.

Today, a nest egg refers to a big lump sum or a substantial amount of money saved or invested for a specific goal. Usually, a nest egg is created and maintained to meet long-term goals. These goals could be anything ranging from retirement, your child’s education, or buying a house. You can also have nest eggs for short-term goals like buying a car or going on an exotic vacation. There is one other nest egg that you should never forget to create. This is for emergencies. You should always have a nest egg that you can dip into in case of situations such as medical emergencies or sudden unemployment.

Financial experts use the term to refer to capital preservation of an investor’s lump sum. These are typically chunks of money accumulated over a period of time. Once you have accumulated a substantial amount of money, it becomes a ‘nest egg’, which you need to preserve. So, you need to keep your nest eggs in a ‘safe’ place. Financial experts recommend that you keep your nest eggs in conservative investments such as Fixed Deposits and Debt Mutual Funds. It is, of course, taboo to put your nest eggs in volatile investments such as stocks and Equity Mutual Funds. This will harm your nest egg.

Additional Reading: Introduction To Debt Funds 

Want to know how to create a nest egg and nurture it? Read on to find out.

Creating long-term nest eggs – When you are creating a nest egg for long-term goals, you can afford to invest in riskier securities. That means you can put your money in the following investments.

  • Stocks – Start with blue chip stocks. Once you are comfortable you can then move on to mid-cap stocks. If you have no knowledge, take the help of a financial expert. Note that long term capital gains for stocks is nil and you need to hold the stocks for just about a year to grab those benefits.
  • Equity Mutual Funds – If you are not comfortable investing in stocks, try Equity Mutual Funds. They can give returns that beat inflation in the long run. You can choose diversified Equity Mutual Funds that invest across sectors. If you want tax benefits, try the Equity Linked Savings Scheme (ELSS). However, note that ELSS Mutual Funds have a lock in period of 3 years.
  • Gold – Gold is a great inflation hedge if you hold on to it for 5 years or more. Typically, the price of gold rises along with the increase in standard of living. This means that gold will remain profitable if you hold on to it for the long-term. The best way to invest in gold is through Exchange Traded Funds (ETF) or by buying gold bars and coins. Remember, gold jewellery has low resale value because you pay for wastage and making charges while buying them.

Other investments that you can consider for your long term nest egg include Public Provident Fund (PPF), Employee Provident Fund (EPF) and real estate.

Creating medium-term nest eggs – The best investments for the medium term include debt Mutual Funds, equity Mutual Funds, corporate deposits and bank Fixed Deposits. Note that your medium-term investments need to be more liquid than your long-term investments so that you can liquidate them in case you need them earlier.

Creating short-term nest eggs – The best place to invest money for your short-term goals would be bank Fixed Deposits, Liquid Mutual Funds and Recurring Deposits. Recurring Deposits are what you should start with for your emergency nest egg.  This way, you can start small, step up when you can, and keep your investments safe. Once you have your emergency fund built up, you can put the amount in your Fixed Deposit or Liquid Fund where you can access the money quickly. Note that corporate deposits are not very liquid so you should avoid investing in them when creating your emergency nest egg.

The liquidity of your nest eggs should be in this order – Short-term being the most liquid, then medium term and then long term. It is better that you choose investments with long lock-ins for creating your long-term nest eggs.

Once you have created you nest eggs, you should use the investments chosen for short-term nest eggs for preserving your accumulated capital. Ideally, you should be doing this at least 2-3 years before you reach your goal.

Creating one big nest egg for all your goals is a big no-no. Most often, people using a single nest egg for all their goals have to compromise on a number of goals because they fall short of funds when they are done with one or two goals. Having different nest eggs will ensure that the each nest egg is earmarked and used only for the goal it is intended for. You will also know exactly how much you need to save. Also, note that the horizons of your goals will vary and so should your investments. This is precisely why it is imperative that you have as many nest eggs as the number of your goals. In this case, even if you have excess funds for one goal, you can allocate the same for another.

Are you now ready to create nest eggs of your own? By creating, nurturing and preserving them, you will ensure they don’t hatch before time.

Additional Reading: How To Create An Emergency Fund 

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