Young and started earning: Lay a strong financial foundation
Young India is aspirational and is working hard to make it big out there. Their hard work in the professional field must be complemented by correct saving and investing habits. Money is scarce and must be grown with care. This doesn’t mean you can’t enjoy. You can save and more importantly invest correctly and at the same time spend on the things you would like to do. The only thing which is required in an impeccable discipline in investing in financial products which suit your risk profile and have potential to fulfill your immediate, short and long term goals. This write-up is not about giving a long, endless boring lecture on why saving and investing correctly is significant for your financial well being. However, such a realization comes a tad late in our life around the age of 35-40. As youngsters and just started earning, saving and investing is the last thing on our mind. Expensive gadgets, parties, road-trips and eating out often takes higher priority. After all, there is a whole lot of time to save in future. So why bother?
This life stage is significant in the sense that if you manage to understand the basics of saving and investing early in your life (even with a small amount), you will lay a very strong foundation of what can be a smooth financially independent life wherein you can enjoy life to the fullest without worrying about money or job security all the time, pursue your interests with confidence, can think realistically of taking an early retirement and at the same time save adequately for your long term goals such as retirement also. How can all this be possible? Start saving and investing correctly early in your life.
At investment-mantra.co.in, we believe investors should learn from others mistakes rather than committing one themselves and then introspecting. A significant amount of money and investment years (25-35 age bracket) are lost in this experimentation process. A good percentage of investors have hefty premium paying ULIP’s and random equity investments to their credit by that time. If there is already a proven methodology such as Systematic Investment Plan (SIP), then why try to re-invent the wheel? Money is scarce and you should make sure that as you grow in your professional life, your money also grows at a phenomenal pace with time by investing systematically and following proven processes.
Don’t just save but invest also – Many young investors now are very good at saving a portion of their salary for the future. Having said that saving alone will not do the trick. Keeping money stacked up at 4% in your bank account won’t make you wealthy. You have to invest it in appropriate financial instruments in proportion to grow your money. Do remember, investing in financial instruments which don’t grow for the long term is also in a way destroying your wealth.
Investing in expensive ULIP’s and shunning equity altogether (not investing in Equity Linked Savings Scheme) in your 20’s can be an opportunity lost.
Control the urge to invest randomly in direct equities based on advice from various quarters – Many investors, in their mid 20’s stop their equity investments completely midway due to losses they incur by randomly investing in stocks. Investors should control such an urge till they get a hang of equity markets, the volatility associated with it, basics of investing, how to identify long term compounding stories. Equity mutual fund is an excellent financial instrument to start investing in equity markets.
Don’t be too defensive in the early years – Getting guaranteed returns is the best case scenario but if you are young and looking to grow your wealth, shying away from equities and stacking up all your money in a bank account or FD’s will not make you rich. In fact, it will barely give you positive inflation adjusted returns. In the early years, you can dedicate a good percentage of your savings to equity for your long term goals as equities tend to give much better returns over a long term. Decide on adequate equity-debt proportion based on your risk profile and start investing. So start a Systematic Investment Plan without any delay as part of equity allocation. It is always fruitful to have an adequate proportion of equity and debt in your financial portfolio but you can’t shun equities altogether. Have it as part of your investment portfolio.
I have come across many investors who save close to 80 thousand per month but are investing only 2000/- via SIP for their long term goals. You need to understand that to achieve all your goals, you need to increase SIP amount as a specific percentage of your savings every year.
Starting your Systematic Investment Plans as soon as you start earning – Starting early is the success mantra, however small that amount may be. You can start a SIP in equity mutual fund with as low as 500/- per month. This is the biggest favor you can do to yourself. Systematic Investment Plans is a must have in the financial portfolio of any individual, irrespective of the age but it holds much more significance for a young investor. If a young investor is able to understand the power of compounding and as to why initiating SIP in equity mutual funds early can make a big difference to the end corpus, that’s about it.
Let’s talk about some numbers. If you start investing 5000/- per month at the age of 25 till your retirement age of 60, you will accumulate 7.4 Crores assuming a return of 15% annual returns.If you start investing the same amount at the age of 30 till retirement age of 60, assuming 15% annual returns, your corpus will be 3.5 crores. 7.4 crores vs 3.5 Crores – I think you can very well appreciate the huge difference.
Most of the times, it’s not that we can’t spare a specific amount (not necessarily 5000/- per month), it’s just lack of awareness on the part of investor which costs them dearly. So in case a young investor or matter of fact any investor is reading the article and have not yet started investing in mutual funds, please initiate one tomorrow first thing. It’s your responsibility to make sure that your money works for you, exactly as you work hard at your work place for your salary at the end of each month.
A high proportion of investors who I have met in the field realizes this big mistake only between the age bracket of 35-40 years losing precious 10 years of aggressive investing in the process. If you are in your 20’s, make sure you don’t repeat the same mistake. Invest via SIP from the very beginning of your professional life.
Don’t introduce too many funds in your portfolio from the word go – Do adequate research before choosing the right funds and have conviction in the mutual funds you choose. A large proportion of investors introduces too many funds when they start investing even if relative SIP amount is pretty less, to begin with. For instance, if you start investing with initial SIP amount of 5000/-, utmost two funds should be good enough of 2500/- each. Choose funds depending on your risk profile and keep investing. Going forward as you increase your SIP amount, you can introduce few more funds in your portfolio. 5-6 funds should ideally make up a good mutual fund portfolio. In addition, don’t choose sector/thematic funds initially if you are a first-time investor in mutual funds.
Don’t stay away from equity markets just because someone incurred heavy losses in the past – Many investors often take cues from someone in the family or friend who had a bad experience with equity investing at some point in time. Investors do take such a loss as a general phenomenon and conclude to stay away from equity markets. It’s always good to learn from the experience of investors who have been in the market at some point in time but assuming losses in equity markets is the norm will be incorrect. Markets are supreme and always rewards investors who have virtues such as patience and consistency in investing regularly in quality businesses for a long time. Always be positive and think about growing your wealth.
Go for consistency of fund over a long duration rather than short term performance – Invest in funds who have displayed consistency in performance across all market cycles. There will be funds who will display short term out performance – especially sectoral funds but keep going with excellent diversified funds in SIP mode. Avoid NFO’s. Don’t try to take an unnecessary risk when wealth can be created by straightforward means. Don’t panic in case fund manager exits or fund starts to under perform the peers but put the fund on the watch list for the next few quarters and monitor its performance closely against its peers. Keep increasing your SIP in existing funds as your inflow increases. Monitor your portfolio performance every 6-8 months. In case the fund under performs consistently for few quarters, don’t hesitate to switch to a better performing fund. Time lost in underperforming funds for years is also an opportunity lost. In case you need a professional advice, do take one. Don’t hesitate and procrastinate.
Choose Equity Linked Savings Scheme (ELSS) funds as a tax saving instrument under Section 80c – Many young investors are unaware of tax saving instruments under Section 80c. They primarily invest money in tax saving FD’s or insurance policies to save tax. Young investors can look at Equity Linked Saving Schemes as an option, not just to save tax but also as an instrument to create wealth over a long term. An ELSS fund such as HDFC Tax Saver has given phenomenal returns over a 20 year period. ELSS funds have a lock-in of three 3 years but this should not dither investors as investing in equities is for long term goals. Some investors take money out of ELSS funds after lock-in is complete. Avoid redeeming and keep investing via SIP.
Initiate equity investing through equity mutual funds rather than direct equities – Though it can vary from investor to investor but an investor who doesn’t have any prior experience of investing in equities can take the mutual fund route. Investing via direct equities can wait till you get a hang of investing in markets, incur much-required discipline to stay invested in equity markets even during volatile times and keep investing regularly across market cycles. Volatility is investor’s best friend in the long run. Occasions such as Demonetization, Brexit when market volatility is at its peak can teach investors valuable lessons as to how to keep their feet on the ground and don’t panic unnecessarily. Investments made at worst of times when market sentiments are at an all time low yield best results in the long term.
In case investor though a beginner, still wants to initiate investments in direct equities, the investor will be better off investing in steady, long term proven and compounding stories rather than speculative stocks.
Keep your feet on the ground and don’t be carried away – If you, in fact, decide to start investing early, you will see benefits of investing systematically over the period of time. Keep your focus intact and don’t allow this discipline to translate to over confidence. Keep increasing your SIP’s every year and navigate into direct equities only if you understand the business of company you are looking to invest well. Remember markets don’t move up in a linear line – there can be years of underperformance followed by a bull market. Keep investing through all these market cycles to get attain maximum benefit.
Stay away from impulsive buying – Just because your friend has bought a new iPhone doesn’t mean you have to buy the same. With money stacked up in your bank account, it’s easy to get carried away and splurge on expensive things, some thing which you can do without it. Think twice if you really need it. As an individual, one can enjoy and save(invest) at the same time by taking some logical financial decisions.
Invest in your career growth – More salary inflow means more savings which in turn means more money available for you to invest. For a strong financial life, you need to have a good hold in the field you work in. If that means pursuing a short term professional course or a professional certification to enhance your career prospects, don’t hesitate just because it has a cost associated with it. Keep learning and keep enhancing your skillset.
We hope above write-up will be useful to investors and they will take a cue from the write-up and will look at equity for long term goals. If you have any queries or want to start investing in mutual funds buy don’t know how and from where to start, drop us an email to firstname.lastname@example.org in.
Disclaimer: The author has investments in mutual funds via SIP mode and opinion may be biased. The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.