Only a minority of the vast Indian population invest to build a financial future. This lack of investments points towards the untapped potential of wealth creation that exists and the solid future foundation these investments could build. India consists of a young population who is stepping into their professional lives or are preparing for it. Youngsters are usually told to earn money through their hard work but nobody mentions that best investment options chosen in the present could have them a better financial future. They are taught to earn and save but they are not taught to earn and invest. The majority of the population still remains under invested because of the lack of basic investing knowledge and awareness that is passed on from one generation to another. Investing knowledge and awareness about Financial Planning in our country is still being inculcated by the present generation and not acquired.
There is an entire army of young professionals in the various sectors who are just beginning their professional careers. They are developing a habit of living from one pay cheque to another and enjoying all the luxuries that money can offer. More often than not they do not have any or enough savings for any kind of emergency and easily resort to means of easy credit, personal loans and credit cards. Soon they build a bubble of credit around them and create a series of outflows and limited means of inflows only to find themselves in a financial mess. This is a common story with many young professionals who have avenues to spend and none to save or invest.
There is no readymade method of investing. Every individual customizes the investments suiting their needs. Hence, investing for the young professionals comes with its unique edge. Let us see how investments could be done to suit the needs of the young guns in the age group of 20s, 30s and 40s.
Make Investments a Priority
Have you ever wondered why you cannot save as easily as you can spend? The answer is simple; you have convinced yourself that spending is a priority. You probably start every month with the conviction to save a little but you realize that you have no funds to save. Hence, by making investments a priority you will keep aside a stipulated sum every month before the expenditure begins. Once you inculcate this habit it is an indication that you have been able to make savings a priority. Keeping investments aside, financial advisor and experts, often emphasize on having a personal budget to better monitor the outflow of cash.
Financial Goal Setting is important
Investment may feel like an exercise in futility if there is no future viability. Instead of a vague notion of investments which could be useful in future, define your financial future. Make a list of your short term, mid term and long term goals in life, the time frame within which you wish to achieve these and the corpus required for each of these goals. Putting a price tag on the goals is particularly important because it would be a disaster if you have an underfunded corpus. This allows you to prioritize and channelize your investments to achieving the goals.
The Golden Rule of Investing: Start Early through SIPs
On the investment journey time is your best friend and worst enemy. You can befriend time only if you start early and enjoy the fruits of time value of money. Investments generate inflation adjusted returns through compounding. Hence, only by starting early will you be able to maximize returns. One of the myths that stops an investor from investing is ‘you need a lump sum to invest’. In fact, you need as small an amount as Rs. 500 to start investing in Systematic Investment Planning (SIP) and continue paying the amount monthly
Source: Advisorkhoj SIP Calculator Assumed Rate of Return: 15%
In the table above it is clear which investor has time by its side. So now you know that Rs. 2,000 invested monthly over a period of 40 years is perhaps more effective than Rs 25,000 for 10 years. Investing regularly through SIP route is the proven way of wealth creation in the long term
Ride Higher on Equities
When you first discussed investments with your friends and colleagues they must have cautioned you against investing in equities. The myth often associated with equities is that it is risky and not a stable means of investing. While there is no doubt that investing in equities is risky but the fact is that they are also one of the highest return generators amongst all asset classes. The risk gets reduced to a greater extent when the period of investment is at least five years or higher. Historically, the returns generated by equities have beaten the inflation thus you stay ahead of inflation.
Equities are not a product but an asset class. As an asset class there are many products that are equity linked and each one of these products have their own degree of risk. Large cap funds, Mid and Small cap funds, Equity Linked Savings Scheme (ELSS), Diversified Funds, Hybrid or Balanced funds are some of the equity oriented products in this asset class. Hence, as a young investor if you want to experiment with moderate risk equity products then investing in the Large cap, Balanced funds or Diversified Equity funds could be suitable options. However, if you look for higher returns and thus willing take high risk then Mid and Small Cap Funds could be a better options.
As young professional equities is your best bet for the long term. Some equity funds generate returns of 20%-25%, some equity products have known to generate as high as 90%. By investing in equities you enter a diverse realm of possibilities. With equity investments and time by your side you could have a successful investing journey.
Start Investing Through ELSS
Since you started receiving a salary Income tax has been eating away a substantial amount. What if you could invest and save taxes at the same time? Equity linked Savings Scheme is a tax saving instrument where tax rebate up to Rs 1.5 lakhs is allowed u/s 80c of Income Tax Act. ELSS has a lock in period of three years and the long term capital gains on ELSS are not taxable as well. Hence, if you feel that taxes are eating into your investment funds then ELSS maybe the ideal option for you to start investing in the early days of your career. It is ideal to stay invested for three to five years to get the best results.
Term Life Insurance: A Necessity
When you joined your first job, the banker or a financial advisor may have pushed for a certain insurance product. These insurance products are usually sold because they attract a higher commission for the seller. Instead of falling into such schemes buy a Term Insurance Plan. Term Insurance Plans usually provide protection against life risk till a certain age, say till 70 or 75 against a small premium. You can select the term plan on the basis of your income and family status. The life cover under the Term Life Insurance plan can be increased as your income and financial liabilities increase. This helps you keep yourself insured and your family protected.
Start Your Retirement Planning
If you think retirement is far away in the horizon you are mistaken. ‘Retire early retire rich’ is a common saying and easily achievable as well. The key is to start early and not underestimate the importance of retirement planning. It is not uncommon to start planning for this at last which is fatal and common mistake. In the table below, the investors have shown to start retirement planning at different ages with the same amount. The difference in the returns is visible in their respective values. The investor who started at the age of 25 years earned nearly 14 times more than the investor who started investing in 40s. Still thinking if it is too early to start your retirement planning?
Young professional should start investing early and take advantage of the power of compounding. Keep your investing life simple - take a Term Life Insurance plan that takes care of your life coverage and protects your family in case of any unforeseen events. The remaining savings can be channelized towards wealth creation by investing in various Equity Mutual Funds schemes suiting to your risk taking appetite. If you are a moderate risk taker looking for steady returns then you could also explore the option of debt funds and maybe the traditional investments like PPF. Remember, when you are young, you have time by your side, so make it your best friend and start investing!