How Should A 22-Year-Old In India Invest Money?

Just starting out? Now’s the time to create a solid plan for investing and saving. Here’s a step-by-step guide for young investors.

Investing a share of your income while in your 20s can do wonders as long as you plan carefully. The simplest way to achieve financial freedom is to spend less than you earn and invest the difference.

Investing is the key to wealth creation, yet the biggest mistake people make is that they don’t start early. When we are young, we prefer to stock up on the latest gadgets and gizmos instead of thinking about a retirement goal, which seems a long way away. The realisation that we should’ve taken investing more seriously often hits most of us when we’re in our mid to late 30s and the spectre of financial and family responsibilities start to haunt us.

At that point, it can be a rude wakeup call, especially if you happen to be slacking when it comes to securing your financial future. Achieving lifelong financial success can seem like an overwhelming task, but by taking things step by step, you can gain long-term control of your finances with no hassle.

Here are a few investing tips for young investors:

Start Small, Earn Big

If you are in your 20s and new to your job, the best plan would be to start saving a small amount every month. Do you know that you only need as little as Rs. 500 to invest in Mutual Funds through a Systematic Investment Plan (SIP)?

A SIP is nothing but the strategy of investing a fixed amount periodically in Mutual Funds that are best suited for you, which will ultimately help you achieve your financial goals.

When you are young, you have time on your side and don’t have anyone depending on your income. This is the best time to inculcate the discipline of saving and investing regularly. To top it all, the magic of compounding also works when you start early and stay invested.

Additional Reading: 10 Benefits Of Investing In Mutual Funds

For example, if you start investing Rs. 5,000 every month when you are, say 22 years old, and stay invested for 30 years, you can easily accumulate a corpus of nearly Rs. 92 lakh, considering 15% annualised returns and taking the annual rate of inflation to be 6%.

However, if you start with the same amount even five years later, your total corpus will reduce to just Rs. 56 lakh.

As your income grows, you can simultaneously increase your investment amount and thereby increase the value of your growing returns.

Additional Reading: Tips For Ideal Portfolio Diversification

Focus On Short-Term Goals

Along with your long-term goals, it’s important to focus on your short-term goals too. For a short-term goal like paying off an Education Loan, you can invest in debt Mutual Funds.

Debt Mutual Funds invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, and Corporate Bonds. However, they do not have a fixed maturity date nor do they pay a fixed rate of interest. If you have a low-risk appetite, you can consider Fixed Deposits (FDs), which are less risky and give you decent returns.

It might be easy to make periodic investments, especially if you have other expenses such as an Education Loan. Most financial products, including most categories of Mutual Fund schemes, Public Provident Fund (PPF), bank deposits and even direct equity investments, can be invested in with fixed or variable periodic investments.

Additional Reading: Investments For Young Professionals

Incline Investment Goals With Tax Planning

Considering everyone who earns has an income tax liability, tax savings should also be kept in mind while making investment choices. By doing so, not only will you save on your tax liability, but you will also make the most out of your money.

Do make sure that you diversify your investments adequately in both market-linked products as well as debt instruments. Traditional tax-saving investments like PPF and Fixed Deposits usually don’t have the capacity to earn inflation-beating returns. Therefore, include ELSS (Equity Linked Savings scheme) in your portfolio to create a sizeable corpus and beat inflation. Sure, equity can be risky, but over long periods, the risks are minimised and you can earn higher returns as well.

Additional Reading: Start Your Tax Planning Now

Build An Emergency Fund

The next ideal step is to build an emergency fund that is sufficient to take care of at least six months of expenses. This will make sure that you do not have to sell your growth investments in case of an unforeseen situation like loss or reduction of income.

Take Adequate Insurance

At this stage, you probably don’t want to be bothered about things like a Life Insurance policy. But, at the risk of sounding like a bunch of boring individuals, we must say that while it is certainly okay to enjoy one’s life, it is also important to stay prepared for life’s emergencies. Getting insurance early in life has many benefits too.

Most importantly, the premium rates are low when you are young. You are more likely to avoid being rejected for a policy because age is on your side. Premiums increase as you age, which means if you were to take the same policy five years later, the premium rate would increase.

Therefore, it is essential to have adequate Life and Health Insurance cover by way of a term plan and basic Health Insurance. While a term plan will take care of the loss of income due to the death of the breadwinner, a Health Insurance cover will take care of rising medical costs. But, don’t fall for money-back plans that typically give you much lower returns on your investments.

Grow Your Riches

Most of us are living paycheque-to-paycheque despite drawing a good salary. We often run out of money before the end of the month and find it difficult to pay our bills on time and crawl to make ends meet, let alone saving for retirement.

But, with this laid-back attitude, we tend to forget that the ghost of retirement is going to haunt us anyway. If not now, then a few years later. This realisation often hits most of us when we’re in our late 30s.

So, your plans for your retirement should be designed and implemented as soon as you start working. This may seem like a daunting task, but it can be easily managed. Say, at age 22, you start investing as low as Rs. 5,000 every month into an investment instrument earning 12 percent annual returns. After 30 years, when you are 52 and approaching retirement, the value of this corpus will be around Rs. 1.54 crore.  So, the earlier you start, the better.

There are several retirement plans that you can consider, ranging from the National Pension System (NPS) to unit-linked pension plans to regular Mutual Funds. The focus of all these plans is on fund accumulation, which will help your money grow over time.

Seek Professional Help

When you are just starting out, getting expert advice can help you choose the right products and can build an appropriate roadmap for all your financial goals. A financial advisor can guide you in managing your finances, whether it’s saving for a holiday, planning for retirement or adjusting your debts. The right advice will help you achieve your goals faster.

Additional Reading: Hire a Financial Planner!

As Richie Nortan said, “At the end of the day, if you’re wasting your time by not investing in yourself, you’re going to waste away and that would be the greatest waste of all.” Don’t forget to invest your time and money in yourself, whether in the form of learning something new or just pushing yourself out of your comfort zone to achieve something. Trust us, it will always pay off.

Adopt these simple steps and you will be on the road to financial freedom in no time. Happy investing!