When we are in our early 20s, most of us are actually growing into an adult. While is it is nice to be growing, it is also the time when many of us enter the job market with a realization that we have to work seriously and earn to pay the bills and live the kind of life we desire.
The early 20s is also the period when by taking a few smart steps, you can ensure to be wealthy in your 30s and beyond. You can make this possible by making your money work for you by following a smart investment strategy in a disciplined way.
When you are in your early 20s, you must have heard that time is on your side and your money can compound. Actually, what happens is that if you start investing at the age of 20 and invest till the age of 55, the final corpus will be much larger than what you may get if investing from the age of 25 because of the power of compounding. Initially, you won’t see a lot. But if you start investing early, you will see amazing returns, due to compounding at a later age.
You will be surprised to know that even Warren Buffet started investing when he was 11 years old. Currently, he has a net worth of around 103 billion dollars. Interestingly, around 100 out of the 103 billion dollars came after Warren Buffet’s 65th birthday!
Now, you may be thinking about how to start investing, how much to invest and where to invest.
Thanks to several apps, investing is as easy as playing a game on a smartphone these days. But to know how much should you invest, the trick is as much as you can. The more the better!
How much to invest
The first thing you need to do is save as much as you can to invest. For this, you can divide your income into three categories – Needs, Wants, and Savings.
Dedicate a fixed percentage of your income towards savings. The Thumb rule is 50:30:20 i.e. 50% for needs, 30% for wants, and 20% for savings. But now that many of you are living in your homes due to work from home, you may afford to dedicate a larger part of your income to savings.
If you dedicate a fixed amount to saving, you will be disciplined. And, you need to be disciplined in your 20s for better returns at a later age. The saving you want to do every month should be a realistic number. You should optimize it. Spend but not splurge!
- First, It is not right to immediately start investing. Instead, you should clear off your debts (credit card dues, loans, etc.) as these make you pay very high interests.
- Second, ensure you have your life and health insurance. Insurance covers are necessary to meet unexpected emergencies.
- Third, have an emergency fund. This can be equal to 3-6 months of salary expenses. An emergency fund can also be created along with investing.
- Fourth, invest in yourself. Learn new skills or buy new equipment that may help you do earn more.
Where to invest
There are three options: Equity, Debt, and Alternative investment
Equity investment can be done via direct stocks or mutual funds. Investing in direct stocks is very cumbersome and tricky. For starters, an equity mutual fund is an easy option for investing in equities.
There are two types of MFs:
1. Passive Funds (index funds)
2. Active Funds
Investing passively means the mutual fund manager does not have to put his brain. Here, the manager will blindly copy all the indexes and you may get a return that is at least equivalent to returns of the market.
Starting SIP in index funds is a very good first step as the return is equivalent to the market. It is good for starters. You can start investing in other funds when you start knowing more about them. With an index fund, you can’t go very wrong in selecting also.
However, there are some funds that still beat market returns. So it is not advisable to put all the money in index funds.
In active investing, the mutual fund manager puts in his brain. But you need to do some research to find the best funds to invest.
How to select a good mutual fund
You need to check the factsheet of the mutual fund to know about
- Past History
- Expense Ratio (1.3-1.5%, it should not be more than that)
- Asset Under Management (Large AUM means the fund can be assumed to be more safe)
- Fund managers profile – Check his ideology, track record
- Companies in the MF – Check all the companies and industries in which the fund is investing.
Debt investing can be done Directly. But it is not advisable for retail investors. It is better to invest in Debt mutual funds. It is also good if you are investing for less than five years and to get the overall risk of the portfolio down.
A debt mutual fund is something in which you should look for investing for less than 5 years.
Types of debt fund
– Ultra short term/liquid fund (less than a year
– Short term: 1-3 yers
– Medium: 3-5 years
– Long term: 5+ years
While investing in a debt mutual fund, it is important to ensure that the time horizon you have, your debt fund should have the same time horizon.
How to select debt MF
- You should not chase excessive returns
- Check fund manager’s history of 10 years
- Check quality – 70%, minimum A rated
- Check where the money is invested – PSU, corporate.
- Check brand name
- Check Asset under management
The thumb tule for investing in debt is that it should be equal to your age, But depending on your risk appetite, you can increase or decrease it.
Initially, you should select 1-2 good mutual funds, select one 1 good debt mutual fund and start investing. Ideally, you should keep your investment as simple as possible and disciplined for truly benefitting from the power of compounding.
The alternative investment options are Gold, cryptocurrency, REITs, foreign stocks, etc. All of these have varied risks and benefits. You should be aware of them before investing.
Your investment in alternative options would be around 10-20% of your portfolio.
For tax-saving, you can invest in options like PPF, NSS, ELSS, 5-year Fixed Deposit etc.
(The above is based on a session by personal finance expert Anushka Rathod during Thrive by Groww- Retail Investor Summit on 15th August 2021. The views and suggestions mentioned above are those of the panelist. You should consult your financial advisor for making investment decisions.)