As soon as a person starts earning, he/she should also start saving money and invest in a planned way to meet life goals effortlessly. As ‘time’ is the most crucial factor in the formula of compounding interest, by investing early, a person may unleash the power of compounding to boost wealth creation.
However, for a successful investment journey, one should build a foundation first to ensure that the journey doesn’t go off the track.
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Satish Prabhu, Head – Content Development – India, Franklin Templeton lists the steps that a first time investor should take to start his/her investment journey:
Emergency fund
Maintain about 6 months of your expenses in a mix of savings account, liquid mutual fund and bank deposits, to tackle unseen emergencies.
Start early
The earlier you start investing, the better will be the wealth creation effect over the long run owing to the power of compounding. Start investing through a SIP in a mutual fund from January 2023.
Step-up each year
Step-up your SIP by 5-10 per cent every year as per your salary rise to help improve wealth creation potential.
Tax planning all year round
Do not save taxes at the fag end of the financial year but invest all year round. Equity Linked Saving Schemes (ELSS) offered by mutual funds are eligible for tax benefits up to Rs 1.5 lakh per year. If you are in the highest tax bracket of 30 per cent, the tax saving will be in the range of Rs 45,000.
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Keep emotions out
Investors often succumb to emotions of greed and fear. They sell when equities fall and buy when they rise. Stay resilient across market cycles and invest for the long run.
Invest as per goals
Invest as per your goals. Short term investments like debt and hybrid funds for near term goals of less than 5 years and equity funds for long term goals beyond 5 years.
Diversify
Invest across asset classes like equity, debt, gold, real estate, global assets so that there is diversification of risk and performance. Mutual funds provide a readymade asset allocation through Balanced Advantage Funds, hybrid funds, etc.
Insure yourself
Buy a term policy for life cover and a mediclaim policy for health cover of your family. The younger you are, the lower the premium.
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Disclaimer: Tax deductions mentioned in the article are as per prevailing tax laws. The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications.