Gatha Singh, 22, works as an Analyst with 60_decibels, a social impact measurement firm. For Singh, retirement planning is a distant goal that she’d rather not think about now. For the moment, she has her eyes set on travel. “One of my major goals is to travel every month,” she says.
To this end, she sets aside 50 percent of her salary and invests it in a basket of mutual funds (MF), stocks, and a bank recurring deposit (RD). While the goal of monthly travel is a bit lofty, she is on the right path — regular savings to meet her goal.
Like Singh, there are many youngsters who enter the workforce every year. Deciding how to invest your money in your 20s can seem overwhelming at first. You don’t need to have a lot of money to be a successful investor. The most important thing is to start early, and take baby steps. “Find a balance between impulse spending and investing for your future,” says Kalpesh Ashar, a certified financial planner and SEBI registered investment advisor.
Start early
It is good to start investing as early as possible, ideally when you receive your first salary, and avail of the benefits of compounding.
For instance, let’s say you started early and invested Rs 1 lakh, and your investment grew 14 percent per annum. If you stay invested for 20 years, you will end up with Rs 13.74 lakh.
But if you start later and can stay invested only for 10 years before needing the money, then you will end up accumulating only Rs 3.70 lakh. That’s the power of compounding.
Ankit Bhuria, 23, who works as an Analyst with S&P Global, started investing at the age of 18. “I started a SIP (systematic investment plan) of Rs. 1,500 at the age of 18, which I still continue,” he says. After his first pay, his investments went up. Bhuria, who lives with his parents and therefore saves on rents and food expenses, prefers to channel 30 percent of his salary into fixed deposits (FD) and public provident fund (PPF), and nearly 50 percent into shares and MFs, including one tax-saver fund.
Build a nest egg
When you have just started your first job it may not be the best time to think of layoffs. But many start-ups are struggling. Many technology companies are also going through tough times and laying off people. It’s crucial to be prepared for such eventualities.
“Build an emergency fund with FDs, liquid funds, and ultra-short funds,” says Kiran Telang, Co-Founder and Director, Dhanyush Capital Services.
One can keep a part of their salary aside every month to build a fund that covers six months’ worth of essential expenses. These are expenses you just can't avoid: rent, food, your SIP investments, insurance premium, etc.
Focus on goal-based investment
“One can follow the 50-30-20 rule to plan one’s budgeting strategy and determine the minimum investment amount,” explains Prableen Bajpai, Founder of FinFix Research and Analytics.
The rule is very simple. It requires you to divide your take-home pay into three parts. 50 percent of the income is for needs, 30 percent is for wants, and 20 percent for the future. You will have buckets for each of these and will be operating within the permissible amount for each bucket. This will instil a sense of discipline while also ensuring that you do not compromise on your quality of life or long-term goals.
The 20 percent allocation depends on the kind of goals one has:
• Bank FDs or RDs for ultra-short-term goals.
• Liquid and debt funds for short-term goals.
• Pure equity for long-term goals.
While 50 percent of the income might go into necessary expenses for someone living away from their home, it can be substantially lower for someone living with their parents.
Though the 50-30-20 ratio may not be the right solution for everybody, it can surely help one learn how to manage one’s needs, wants, and long-term goals in a disciplined manner.
Diversification is key
Keep your portfolio simple. Do not have too many investments. But don’t have just one MF scheme or just one stock. Diversify. As your salary goes up every year, invest a bit more.
Ashar says that in your early 20s, a significant chunk of your money should be invested in equities. “Around 10 percent of the entire investment amount can go into fixed income, which can be divided into FDs, RDs, PPF, and debt funds,” he adds.
Equity MFs like flexi-cap funds, multi-cap funds, and index funds are perfect for those beginning their investment journey.
Ashar advises against buying stock directly until one understands the equity market well enough.
Avoid crypto and real estate
Crypto is a big no-no for all the experts because of its unregulated nature and high volatility. Real estate investments at such an early age are also advised against as it impacts your flexibility with money.
One should only explore cryptocurrencies if one is okay losing that amount of money. Any money put in these coins should not be counted as an investment.
Real-estate, on the other hand, puts you under a huge debt at a very early age. With uncertainty in the job market, one should ideally avoid investing in real estate till the time they are able to pay 50-60 percent as down payment.
Finally, remember the 3 golden rules:
• Be patient. Don’t get in and out of investments frequently.
• When investing, boring is good.
• Do not speculate. And do not go by tips.
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