20’s is usually the time most of us start earning which also means the beginning of a life long journey in money management.
One of the biggest benefits of investing so young is that
you are free of any baggage.
Most people by the time they are in their 30’s have had some
sort of negative experience with money, be it with equities, banks, gold, etc.
and then tend to prolong that experience. This is not the case with someone
just starting out.
How you begin is extremely vital, not that you cannot
recover from a poor start mentally.
More often than not though, when it comes to money people
tend to be more rigid than other matters of life.
Invest early
Start investing as early as you can since this
will only benefit you in the long run. Another benefit of this is that you can
start off with a smaller amount until you are at ease and take to it like a
fish to water.
Responsibilities are fewer in your 20’s in most
cases comparatively so this gives you a higher risk appetite. Things don’t
remain constant though and with passing time, responsibilities will also
increase which would also mean a considerable decrease in your risk appetite.
Start with a Systematic Investment Plan (SIP)
irrespective of the amount since it is important you begin. Habits take time to
form but they only do once you begin, it’s important you begin.
Have a Plan and stick to it
When you invest in Mutual Funds, it is vital that you have a
plan and stick to it even during turbulent times.
You cannot dictate market conditions but you can certainly
control your emotions. It is one thing to feel anxious during a market downtime
but it is another thing to act on that anxiety.
Be proactive and not reactive
In simple terms having a plan would include
- Asset allocation
- Diversification
- Amount to invest
- Duration of investments etc.
Since you start off young, it would give you ample time for
growth along with a higher risk appetite.
If you keep on straying away from your plans without any
strong reason to do so then there is absolutely no way you can reap the
benefits of compounding.
Understand the difference between needs and wants
- When you understand the difference between needs and wants, you understand the difference between money and wealth.
- A simple example of need is when you are hungry and need food but a want is when you want a particular dish from a particular place at a particular time.
- Indulgence in wants every once in a while is accepted and even encouraged but when your wants exceed your needs then you have some serious questions to answer.
- Instant gratification that leads to an overflow of credit bills and liabilities is something that can be easily avoidable.
Work with a qualified advisor
- This unfortunately is very rarely spoken and yet a very important point.
- A licensed consultant will not only guide you cautiously but will also help you avoid the pitfalls.
Avoiding losses is as important as making gains
Please keep in mind the following people do not qualify as
qualified consultants
- Friend
- Colleague
- Relative
- Banks etc.
There have been ample examples of people losing their hard
earned money paying heed to the above list.
Click Here to read how this couple from Delhi lost Rs 2 Lakhs in 10 months by relying on the advice of their colleague
Stay in touch with your consultant at least on a quarterly
basis, keep him/her updated of any new life event from a change in job, raise
at work, marriage, etc.
This would help him/her make necessary changes to you
portfolio if needed.
Have a Goal
- As long as you are human, you will have a goal.
- How many times have we noticed people in their 50’s and 60’s regretting that they never had a retirement plan? Plenty!
- So if you do not have a goal then make retirement your goal since retirement is something that we all go through, it’s not optional.
- The young feel investing for retirement so early is not worth whereas the elderly rue not investing for retirement when young.
- Do not let yesterday’s mistake becomes today’s regret.
- Having a goal will also help you stay on track and not panic during a market downtime, so make sure your mutual fund portfolio is aligned with your goals.
For eg. Let’s say that you are investing towards your
child’s higher education which is 15-20 years away, in such a case even if the
markets underperform for a couple of quarters, what will give you strength
during such times is knowing that your goal is still a long way away.
You can use the following table to get an idea of the
different types of goals
Short Term Goals
|
1-3 years
|
Medium Term Goals
|
3-5 years
|
Long Term Goals
|
More than 5 years
|
Use your Bonuses and Pay Hike
- A very common mistake that investors make is not increasing their SIP’s with a pay rise.
- Keep in mind that there needs to be an appropriate rise in your SIP amounts with an increase in your salary as well or else you will struggle to stay in touch with your goals and expenses.
- When you increase your SIP’s with an increase in your salary you give yourself the opportunity to reach your goal earlier than usual.
- As you career grows, so should your investments.
How to use your bonus
- You either make a Lumpsum investment using your bonus amount or in case you are not comfortable doing a lumpsum investment then a Systematic Transfer Plan would be helpful.
- You would need to speak to your advisor as to where the lumpsum amount fits into your portfolio,that is in either your existing portfolio or a new one.
Take advantage of ELSS (Tax saving mutual funds)
- As your career grows so will your salary.
- Sooner or later you too will make it to the tax bracket and will need to file your taxes
- Now when it comes to filing your taxes, keep in mind that the government allows you a tax exemption of up to Rs 1,50,000 under section 80c under the Income Tax. These exemptions would include your health insurance, LIC, ELSS (Tax saving mutual funds) among others.
- A Tax saving mutual fund scheme would be a great way for you to venture into the world of equity mutual funds since they come with a lock in period of 3 years (The lowest among all the tax saving instruments).
No other tax saving instrument can give you the dual benefit
of saving along with equity returns, not only would you be saving taxes but
also be gaining equity returns on them.
Click Here to read how to make the best use of Tax Saving Mutual Funds
Emergency Fund and Mutual Funds
- As a thumb rule it is never advisable to invest your entire savings into equity mutual funds.
- You need to keep aside a certain amount that would take care of your needs in case of a financial emergency.
- Instead of using your banking savings account, you can take advantage of Liquid Fund in mutual funds that give you slightly higher returns than your regular banking savings account.
The key thing to keep in mind is that a liquid fund is not
for higher returns but rather for emergency needs, so adjust your returns
expectation accordingly.
Inflation and Mutual Funds
- Inflation is a lot like the weather, you cannot control if it rains or not but you can always carry an umbrella.In the same manner you cannot control inflation but you can always use Equity Mutual Funds to beat it.
- If inflation is at 6% and your savings account is also giving you 6% then how exactly have you made any gains?
- The MBA college fees that cost you 15 Lakhs today will be double in 10 years if not more.So when you are planning for your child’s future education, keep in mind that you will not be planning towards 15 lakhs but rather 30 Lakhs.
Education inflation is not the same as regular inflation,it
is notorious for running at a speed faster than regular inflation. You
therefore cannot afford to make the cardinal sin of comparing it to regular
inflation.
Starting early in
such a case has the following advantages
- Starting off with a smaller amount
- Not needing to be worried about timing the market
- Taking advantage of rupee cost averaging
- Having a longer time to achieve your goals.
Surround yourself with the right people
- This may not seem as something to be considered but in the long run it matters dearly.
- As previously mentioned, you need to learn to differentiate between your needs and wants. If you are spending purely out of peer pressure then that is lifestyle inflation and not regular inflation.
- How many of us have subscriptions to Netflix, Gym memberships, etc. and yet how very rarely do we make any actual use of them?
- The question in such a case that we need to ask ourselves is do we really do not have money to invest or do we merely need to get our priorities sorted.
Surround yourself with folks once in a while you can discuss
financial growth too since you cannot afford to let that be an afterthought.
Yes, investing in Equity Mutual Funds does have its fair
share of risks but if there is anything more risky than investing in Equity
Mutual Funds then it is not investing in Equity Mutual Funds. Take advantage of
your youth for a brighter and a more stable future rather than look back at
life with regret.
Remember there is risk and then there is calculative risk,
the latter should be your aim.
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Disclaimer: While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.
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