One of the biggest benefits of investing so young is thatyou are free of any baggage.
Most people by the time they are in their 30’s have had somesort 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 someonejust starting out.
How you begin is extremely vital, not that you cannotrecover from a poor start mentally.
More often than not though, when it comes to money peopletend to be more rigid than other matters of life.
Start investing as early as you can since thiswill only benefit you in the long run. Another benefit of this is that you canstart off with a smaller amount until you are at ease and take to it like afish to water.
Responsibilities are fewer in your 20’s in mostcases comparatively so this gives you a higher risk appetite. Things don’tremain constant though and with passing time, responsibilities will alsoincrease 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 toform 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 aplan and stick to it even during turbulent times.
You cannot dictate market conditions but you can certainlycontrol your emotions. It is one thing to feel anxious during a market downtimebut it is another thing to act on that anxiety.
Be proactive and not reactive
In simple terms having a plan would include
- Asset allocation
- Amount to invest
- Duration of investments etc.
Since you start off young, it would give you ample time forgrowth along with a higher risk appetite.
If you keep on straying away from your plans without anystrong reason to do so then there is absolutely no way you can reap thebenefits 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 needfood but a want is when you want a particular dish from a particular place at aparticular time.
- Indulgence in wants every once in a while is accepted andeven encouraged but when your wants exceed your needs then you have someserious questions to answer.
- Instant gratification that leads to an overflow of creditbills and liabilities is something that can be easily avoidable.
Work with a qualified advisor
- This unfortunately is very rarely spoken and yet a veryimportant point.
- A licensed consultant will not only guide you cautiously butwill also help you avoid the pitfalls.
Avoiding losses is as important as making gains
Please keep in mind the following people do not qualify asqualified consultants
- Banks etc.
There have been ample examples of people losing their hardearned 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 quarterlybasis, keep him/her updated of any new life event from a change in job, raiseat work, marriage, etc.
This would help him/her make necessary changes to youportfolio 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’sregretting that they never had a retirement plan? Plenty!
- So if you do not have a goal then make retirement your goalsince retirement is something that we all go through, it’s not optional.
- The young feel investing for retirement so early is notworth whereas the elderly rue not investing for retirement when young.
- Do notlet yesterday’s mistake becomes today’s regret.
- Having a goal will also help you stay on track and not panicduring a market downtime, so make sure your mutual fund portfolio is alignedwith your goals.
For eg. Let’s say that you are investing towards yourchild’s higher education which is 15-20 years away, in such a case even if themarkets underperform for a couple of quarters, what will give you strengthduring such times is knowing that your goal is still a long way away.
You can use the following table to get an idea of thedifferent types of goals
Short Term Goals
Medium Term Goals
Long Term Goals
(Video) How to Start Investing for Beginners | Tips For Your 20’s
More than 5 years
Use your Bonuses and Pay Hike
- A very common mistake that investors make is not increasingtheir SIP’s with a pay rise.
- Keep in mind that there needs to be an appropriate rise inyour SIP amounts with an increase in your salary as well or else you willstruggle to stay in touch with your goals and expenses.
- When you increase your SIP’s with an increase in your salaryyou 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 amountor in case you are not comfortable doing a lumpsum investment then a SystematicTransfer Plan would be helpful.
- You would need to speak to your advisor as to where the lumpsumamount fits into your portfolio,that is in either your existing portfolio or anew 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 andwill need to file your taxes
- Now when it comes to filing your taxes, keep in mind thatthe government allows you a tax exemption of up to Rs 1,50,000 under section80c 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 youto venture into the world of equity mutual funds since they come with a lock inperiod of 3 years (The lowest among all the tax saving instruments).
No other tax saving instrument can give you the dual benefitof saving along with equity returns, not only would you be saving taxes butalso 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 entiresavings into equity mutual funds.
- You need to keep aside a certain amount that would take careof your needs in case of a financial emergency.
- Instead of using your banking savings account, you can takeadvantage of Liquid Fund in mutual funds that give you slightly higher returnsthan your regular banking savings account.
The key thing to keep in mind is that a liquid fund is notfor higher returns but rather for emergency needs, so adjust your returnsexpectation accordingly.
Inflation and Mutual Funds
- Inflation is a lot like the weather, you cannot control ifit rains or not but you can always carry an umbrella.In the same manner you cannot control inflation but you canalways use Equity Mutual Funds to beat it.
- If inflation is at 6% and your savings account is alsogiving you 6% then how exactly have you made any gains?
- The MBA college fees that cost you 15 Lakhs today will bedouble 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 30Lakhs.
Education inflation is not the same as regular inflation,itis notorious for running at a speed faster than regular inflation. Youtherefore cannot afford to make the cardinal sin of comparing it to regularinflation.
Starting early insuch a case has the following advantages
- Starting off with a smaller amount
- Not needing to be worried about timing themarket
- 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 thelong run it matters dearly.
- As previously mentioned, you need to learn to differentiatebetween your needs and wants. If you are spending purely out of peer pressurethen that is lifestyle inflation and not regular inflation.
- How many of us have subscriptions to Netflix, Gymmemberships, 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 isdo we really do not have money to invest or do we merely need to get ourpriorities sorted.
Surround yourself with folks once in a while you can discussfinancial growth too since you cannot afford to let that be an afterthought.
Yes, investing in Equity Mutual Funds does have its fairshare of risks but if there is anything more risky than investing in EquityMutual Funds then it is not investing in Equity Mutual Funds. Take advantage ofyour youth for a brighter and a more stable future rather than look back atlife with regret.
Remember there is risk and then there is calculative risk,the latter should be your aim.
Got some questions ? We've got the answers,
email us at email@example.com
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.
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing
Copyright © 2019 The Mutual Fund Guide, All rights reserved.
Stocks, bonds, and mutual funds can all be good places to start investing in your 20s. But don't count out other alternative investments outside these markets. Real estate is one example of an alternative investment that can be attractive to some investors.
Fidelity's guideline: Aim to save at least 15% of your pre-tax income each year for retirement, which includes any employer match.
- Develop good budgeting habits. ...
- Pay down debt. ...
- Automate your savings. ...
- Build good credit. ...
- Start saving for retirement. ...
- Make sure you and your loved ones are covered financially. ...
- Work toward owning your home.
- Contribute to an employer-sponsored retirement plan. ...
- Open an individual retirement account (IRA) ...
- Find a broker or robo-advisor that meets your needs. ...
- Consider leveraging a financial advisor. ...
- Keep short-term savings somewhere easily accessible. ...
- Increase your savings over time.
What is the 50/30/20 rule? The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, simply and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt.