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In 2017, Sarthak Langde (23), residing in Mumbai, graduated from college and shifted to Bengaluru with a job. At the time, he didn’t imagine his monthly expenses will be beyond his limit. While studying, his discretionary and lifestyle expenses were Rs 20,000-30,000 a month. However, during college days parents used to take care of his monthly allowance for expenses.
So, he didn’t have to worry about monthly budget and expenses. However, now moving to the next stage of adult life with job, there are other responsibilities which include managing household expenses away from home and investing in assets as per risk appetite for future goals from monthly income. This scenario is common among several millennials in India as they keep hopping from home city to other cities for better job opportunities after graduation.
Often, millennials enjoy the greatest financial freedom as they start earning. Abhinav Angirish, founder of financial advisory firm, InvestOnline.in advised: “Millennials should start investing early as it gives an edge where you won’t need to rush or cut necessities to make provisions for the retirement.”
It’s been observed, in the early 20s when the investor doesn’t have a spouse or a child to care about, they can plan their finances very well. Millennial should invest at least 30-50% of monthly income. The remaining amount should be utilised for monthly expenses, pay equated monthly instalments (EMIs) or credit card dues, etc.
Avoid investing in risky assets
Often millennial investors, want the highest amount of returns in the short term by taking larger risks while investing. For instance, Langde when he started working in 2017 was not keen to invest in mutual funds or other traditional instruments (fixed deposits, recurring deposits, etc.) and earn 7% to 12% compounding returns in the long term.
So, he preferred investing in direct equities with monthly savings. He invested / traded in equities for nine months then exited from equity investments. Around the same time, bitcoins were in the bulletin for new highs on regular basis. So, he preferred investing in bitcoins and invested about Rs 70,000 after withdrawing from equities.
When bitcoins price were at peak his investment value was Rs 4 lakh. In July 2018, Reserve Bank of India (RBI) rolled out regulations for investors in bitcoins. As per RBI regulations, banks will terminate their existing relationships with firms or individuals dealing in cryptocurrency. This led to sharp correction in bitcoins price. At present, the value of his investment in bitcoins is Rs 12,000 (approximately). He learnt a lesson the hard way of investing in risky assets and registered losses.
Now, Langde has appointed a financial advisor to help him with basic financial plan and set-up Systematic Investment Plan (SIP) in Equity Linked Savings Scheme (ELSS) mutual fund for tax savings and a liquid fund for contingency goal. He now manages to invest Rs 20,000 in ELSS scheme and Rs 10,000 in liquid fund every month. He started investing in liquid funds to build a corpus for contingency.
Srikanth Meenakshi, Co-founder of online investment platform FundsIndia said, “On our platform, we have about 50,000 millennial investors (age category of 25 years and below) in a month. This is 25% of total investors on FundsIndia platform. They prefer to invest in risky mutual fund schemes for thrill but have low monthly investments (Rs 500 to Rs 1,000).”
Repeatedly, these millennial investors prefer to invest in small cap and international funds expecting higher returns in the long run from their investments.
It is advised to identify your risk appetite and short / long-term goals then align your investments. Millennial investors can start with passive funds and large-cap oriented schemes to begin with are a good option before you graduate to riskier options.
Don’t starve, but keep some for rainy day
Often millennials are in dilemma when they start with investing from their monthly income after starting with first job. They are unaware where to invest, how much should go towards living expenses, short-term and long-term goals.
For instance, Vasishta Guru 23, residing in Bengaluru couldn’t start investing from his savings in the first year of job (during the year 2017) due to lack of understanding of financial assets. He was not good at handling money during the first year of job. Often, he used to utilise the savings on discretionary expenses since no determine goal.
However, in the year 2018 decided to appoint a financial advisor on advice of his colleague. His short-term goal is saving for higher education and long-term goal is retirement.
Saurav Basu, Head of Wealth Management, Tata Capital Financial Services said, “Millennials should use the thumb rule – 50:20:30 wherein 50% of the income should go towards living expenses and spending (including outing, food, travel, etc.); 20% towards savings for your short-term goals or for liquidity purpose; and 30% towards long-term goals (like planning for kids, retirement; basically wealth creation).”
When planning a financial goal, it is important to factor in inflation. For instance, if you decide to buy a car that costs Rs 5 lakh today after seven years, it will cost you Rs 8 lakh if 7% inflation is considered.
Have a basic financial plan as ready reckoner
Guru was unclear of his goals and so ended up monthly savings in shopping, travelling, etc. He was able to save 50% of his monthly income but couldn’t utilise it in right channel for his goals and tax savings in the first year. To millennials like Guru who have just started working, a basic financial plan is recommended by Rohit Shah, founder and CEO of Mumbai-based financial advisory firm Getting You Rich.
In basic financial plan, a millennial should first build emergency corpus equivalent to six months of average expenses. This should include your EMIs (if any), insurance premium, utility bills and other recurring household and living expenses. Then make sure your risk management is covered which means having term life insurance plan (if have dependent parents and liability of any loans) and health insurance plan for yourself and dependent parents, followed by investing to minimise tax liability and lastly invest towards short term and long term goals.
Use step-up investment strategy to invest
Millennial investors lack financial discipline and often fail to increase their investments in sync with their rising income. To such investors a step-up investment strategy is recommended by financial advisors.
A step-up investment strategy allows investors to increase their investment in sync with their expected growth of income. This helps investors in deriving greater benefit from the power of compounding, and thereby reach their financial goals sooner.
Naveen Kukreja, CEO and Co-founder of online financial marketplace Paisabazaar.com said, “One of the best ways to implement step-up investment strategy is to opt for step-up SIPs. The automatic increase in the SIP amount at periodical intervals will ensure financial discipline and regular investing.”
A lot of investors get scared by a sudden market drop and redeem or stop investing in their mutual funds. Prateek Mehta, CEO and Co-Founder of online financial advisory firm, Upwardly.in said, “Don’t give up on SIP investments in a bear phase. A volatile market can award you with investment opportunities that you shouldn’t miss. Riding the bear phase while continuing your SIP/ investments, is the only way to make large gains in the equity markets.”
Repaying education loan vs investing
Educational loan is a hefty burden for most of the millennials when they start working after graduation. Repaying education loan chews most of the savings for millennials. To pay out the debt, one must consider cutting down his/her daily expenses, and the saving could be invested. The payment of the EMI should be automated and selected to be nearest to the salary credit date. This would enable them, not to overdue their payments.
Angirish said, “To reduce education loan burden the millennials may use the option of second source income. This will end up leaving some extra money in your pocket. These can be used to pay your educational loan.” You should consider paying off of the loan at the earliest with annual bonus from employer, any one-time income and other investments.
Start investing early for your retirement
Ajit Singh, 40, residing in Pune delayed investing for his retirement goal by giving priority to buying a house and travel goals (international vacations). He is planning to retire at the age of 60. So, now he is just left with only 20 years to save for retirement goal. Based on his average monthly expenses he requires a corpus of Rs 3.5 crore at retirement. Basu explained, “When one starts saving early, the magic of compounding helps. Most of us are unable to measure the true cost of delayed savings.”
For instance, if Ajit Singh now saves Rs 10,000 per month for 20 years his investments will grow to approx. Rs 1 crore (assuming a 12% compounded returns). This corpus amount is much lower than his requirement. However, if he would had started investing same amount at the age of 30 (10 years earlier than now), the accumulated amount would be closer to Rs 3.5 crore (assuming a 12% compounded returns). The difference of Rs 2.5 crore is a huge amount; a 10-year head start can make!
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