The sooner you bring your finances under control, the smoother your life becomes. It is never too early to start investing, even when you are only a few days into your first job. However, young investors are yet to understand the ways of the world completely. They are susceptible to making naïve mistakes that can undo a lot of efforts that they had put toward wealth creation. So, having a sound approach towards investing is very important for young investors.
The first step in investing and financial planning is to identify your financial goals and decide on the time by which you plan to achieve them. It could be a mixture of short, medium and long-term goals – like paying off a loan, buying a car, getting married, buying a house, retirement planning, etc. All of these goals have financial implications, and you have to save and invest towards them. You should check if your goals meet the SMART parameters. These goals must be Specific, Measurable, Attainable, Realistic and Time-bound.
To align your savings and investments with your financial goals, you have to put them up on a scale of time. The expected return, maturity period, liquidity, etc., of the investment, will decide which investment is suitable for which financial goal. An investment made without any underlying strategy can only lead to lower wealth appreciation and financial stress. For instance, investment in Public Provident Fund is ideal for retirement planning but not suitable for the goal of buying a car in five years. Investment in mutual funds with steady short-term returns is better suited for the latter. Retirement planning, on the other hand, cannot rely solely on fixed-income investments like PPF. This is why having the right asset mix is also important.
Your investment portfolio is correlated to your risk appetite and your age. Risk appetite varies from individual to individual. A conservative investor prefers to invest in safe investments that are sovereign-backed and offer fixed income. To raise the risk higher, someone may invest in the stock market, but only through the professional expertise of mutual fund managers. Mutual fund investments can be risk-adjusted by going for varying degrees of equity and debt exposure.
An aggressive investor would allocate a portion of the portfolio to equity investments and derivatives. Besides, there are other asset classes like precious metals, real estate, offshore investments, etc.
While building the perfect asset mix, it is important to study the market trends and delve into analytics. You should also use investment tools and platforms which will provide you with the infrastructure and know-how required for investment.
Young investors must understand the importance of adequate financial protection. This is more important than investing itself. If you have not sufficiently protected your finances, your created wealth can erode massively in emergencies.
Always ensure that you and your family members are insured. Adequate life insurance for the active members of the family safeguards the dependents. Adequate health insurance, on the other hand, financially protects the family in medical emergencies. Health insurance or mediclaim cover will protect you and your family from unforeseen and tragic events like illnesses, accidents, pandemics, etc.
Building an emergency fund is no less important than protecting yourself financially. Having a rainy-day fund means that you will not have to liquidate assets or apply for a loan to meet a sudden emergency. You should have a sufficient emergency fund that can help you survive six to twelve months without income.
Income tax applies to your annual income as long as you continue to earn. As an investor, you must make the most of the tax deductions and exemptions provided by the law. If you manage to put your money in tax-friendly investments, you will save money on taxes and also earn as the investment grows in worth.
In the new income tax regime, many of the tax-friendly investments are being done away with. But you can opt for the old regime or plan as per the ones available in the new regime. You should also time your asset sale and purchase, keeping the short-term and long-term capital gains taxability in mind. Tax breaks can also be earned through specific utilisation of your capital asset sale proceeds. This should also be a part of your plan while selling and purchasing assets.
As a young investor, you must understand the importance of starting early. The power of compounding is living proof that those who start early and maintain their investments end up with the highest corpus.
However, an early and solid start is only half the battle. An important and ongoing task in front of you is to regularly monitor your investments. You should identify the shortcomings or slowdowns in the investments and reshuffle your portfolio if required. At the same time, you should be resilient enough to see through the volatility and the ups and downs in the markets. In other words, be prompt in identifying faltering investments but have reasonable faith in the long-term growth of the market. We hope you embark on a successful investing journey.