By Vikas Mathur
Age of 18 comes with a lot of privileges. You can vote, apply for a PAN, Driving Licence, Credit/ Debit Card and make all types of life decisions independently. However, one thing that often goes missing from the ‘First to do List’ of young adults is the concept of financial planning. Yes, the freedom to manage bank accounts and investments should be celebrated the most. Know that, the earlier you start your investments in the equity linked products, the better you can yield from the markets in the long run.
For instance, Rs 3000 invested monthly in mutual fund SIPs for 30 years can yield Rs. 1.05 crore at expected return rate of 12 per cent p.a. While if the same investment starts after 5 years, the return will be Rs 56.37 lakh after 25 years. Thus, to make the most of the power of compounding, you should start your mutual fund investments as early as possible. However, returns from market linked instruments will always be subject to market risks and 12 per cent return is considered basis the past performance of equity schemes.
Where to start?
Being a young investor you should always think about long term returns. The young age brings the best combination for markets i.e. high risk appetite and long term horizon. You can take your time to learn about the dynamics of equity markets with low capital and identify your unique investment profile. Till the time you complete your formal education in 5 to 6 years and gain a regular income source, you will be ready to invest more, with more confidence and clarity about your goals. To start with, when you have low financial education, make capital protection as your priority. Avoid speculative activities. Understand that investment in capital markets is the only one part of the investment basket. At 18, it is recommended to start exposure in equity markets through mutual funds and blue chip stocks with a minimum of 3 years of horizon. Review and rebalance your portfolio annually. Take your time and test the waters before entering into intraday trading.
Choosing investment instruments
At this age, when you are looking for affordable and less risky investment options, it is best to opt for a mix of mutual fund SIPs, small-ticket size wealth baskets and SIPs in blue chip stocks for steady return in 3-5 years. These instruments have potential to yield maximum by compounding returns, despite market fluctuations and growing your corpus at a steady pace in the long run. Reduce risk when the goals are near and annually review your portfolio and rebalance by replacing low performing funds with higher yielding funds. While for guaranteed returns, bank recurring deposits (RDs) are the best bets for small ticket size investors.
Portfolio diversification is a recommended strategy to reduce the portfolio risk while investing in market linked investment instruments. The ratio of equity and debt in your portfolio varies significantly according to risk appetite, time horizon and financial goals. For instance, in the long term you can use an aggressive approach and build a high equity portfolio which has high risk and high return potential. While for the short term i.e. period up to 1 year, you should choose a mix of RDs and balanced funds to diversify portfolio and reduce investment risk. Remember there is no one size fits all portfolio strategy. Basis your risk appetite and goals, build your portfolio. Do not make your portfolio a sectorally biased, always diversify. Use professional advice and make informed decisions.
Crypto is a buzz, so what?
Investment decisions should not be based on whims and assumptions. As we have seen a lot of turmoil across the globe in crypto currencies, it is recommended to wait for the RBI and Indian government to introduce regulations and norms before considering Cryptos as a part of your investment portfolio. At 18, just as voting is your fundamental right, to start working for a financially secure future is upright.
(Vikas Mathur is the Head, Strategic Partnerships, at Religare Broking Limited. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)