August 23 , 2013
Anil is all of 22 and got in at one of the top IT companies in the country. His first 2 salaries came in and went; he could barely track where to. Four months down and the trend continued. His dad suggested that he save and put some money in mutual funds but Anil dismissed the idea since he thinks it is too early and absolutely unnecessary at the moment.
More and more earning youngsters have disposable income to splurge and save. Unfortunately many, like Anil, think saving and investing business is boring and serious stuff which should be postponed. Some only wake up by the time they're starting a family!
Attention all beginners
The best age to start investments is when one starts earning. Right away! Sure, you might have your share of liabilities to clear before you begin- taking friends to treat, showering goodies on yourself and family… but investments should not be postponed for long.
Early birds have more time- and time is money
Wealth generally requires two main ingredients- seed money and time. Beginning early means you input more time which can never be earned. Time boosts compounding effect to levels you might have not imagined before. Take an example.
You're 23 and invest Rs 10,000 every month in a good equity mutual fund till you reach retirement at age 58. Assuming a modest yearly return of 12%, at the end of these 35 years you would have made Rs 5.5 crores with a total investment of Rs 42 lakhs. Now suppose you're not so prudent so you delay investments until age 28 and stop at age 58. Guess how much would the difference be with a similar rate of return? You'd make about Rs 3.1 crores on an investment of Rs 36 lakhs. Due to the power of compounding a difference of just Rs 6 lakhs translated to a difference of close to Rs 2.5 crores over 5 years. No wonder why Albert Einstein called compounding the eighth wonder of the world!
Early birds can take more risks
Beginning early also means you can afford more risks in your investments. Investment returns are usually a function of risks. Higher the risks you take better the returns you can anticipate. The baggage of liabilities and responsibilities that come with age tend to reduce risk taking capacity for investments. So don't delay building a savings and investing discipline.
Begin the safe and tested way
Ready to plunge? In some people's mind the word 'investment' only strikes shares investment. But not so, a balanced investment requires appropriate allocation in equity shares, debt, gold and even real estate. Real estate is off-scope for a beginner so you need to be invested in equities, debt and may be some gold.
Picking up good stocks requires some experience and knowledge so you can go the mutual fund SIP way until you're ready. Mutual funds are managed by professionals and they also diversify equity risk by having diverse shares. No matter how luring and assuring some online trading ads might be, it is best to stick to equity mutual funds unless you have the time, patience and knowledge for direct shares investment.
For the debt part you can have FDs, PPF, NSC, even debt mutual funds. You might also have company PF building up. It is also good to have exposure to gold from a long term perspective so you can do SIP in a gold mutual fund.
Before any of this, create a contingency reserve worth about 6 months' expenses in a savings account so your investment set-up is not messed up in case unpleasant surprises temporarily rid you of income. When you get on liabilities or dependents don't forget to get life insurance. If you stick to these sound principles not only will all your financial goals be met with zero or minimum debt but wealth too will build up over time. In addition a good financial adviser can play a helpful role in outlining appropriate investment allocation and make changes in it over time.
The earlier you begin investments the earlier you can hope to retire from formal work. In other words, if you start early, you can stop early!