As children, all of us had a piggy bank which held our precious savings. More the money saved, better the chances of buying something big and substantial. The concept of hoarding and saving money is something that every Indian household believes in. Save first and then buy is what we are told and that’s how our journey in the world of finance and investment begins.
For long, the Indian culture believed in making investments, pretty early in life, so that the benefits can be reaped at an older age. But do the youngsters and freshly employed people consider this approach viable? They have a limited cash flow at the beginning of their career and they wonder which investments would assure them of the benefits that they expect.
Finance experts suggest some smart moves for millennials at this stage...
Take it SIP by SIP
Prakarsh Gagdani, CEO of 5Paisa Capital, says that the millennials have much better access to information about investments as compared to the previous generations. But many of them are not early savers and prioritise experiences over saving at an early age. “Youngsters must understand the concept of compounding and how early savings can build humongous capital in times to come,” says Gagdani.
“A young investor can start with systematic investment in mutual funds with the right mix of equity and debt. This is the basic form of investing money but market-savvy young investors can look at investing directly into equities with proper research,” he adds.
How persons in their 20s should invest their funds depends largely on their individual goals. Gagdani explains, “New investors should abide by the thumb rule of 50-20-30. It means 50 per cent of your income should go towards living expenses, 20 per cent should be invested and 30 per cent should take care of aspirational spending, travel and other wants.”
Suggesting a suitable macro financial planning for a person in their 20s, Gagdani says that the young investor should opt for mutual funds, Systematic Investment Plan (SIP). “Many fund managers expect the average equity fund to give a compounded annual return of 13-17 per cent on an average, for the next one to two decades. Therefore, if you invest Rs 10,000 in SIP per month for 20 years, you could see your corpus growing to Rs 1.5 crore in two decades at an average of 15 per cent annual return. Whereas the amount that you would invest in that period is of Rs 24 lakh,” he says.
The key strategy is to stay invested for a longer period, points out Gagdani, adding, “For example, if the same person continues to invest in SIP for 25 years, the corpus will grow to Rs 3.3 crore. In 30 years, it would become Rs 7 crore and in 35 years it would become Rs 14.9 crore. It clearly means that patience is key for successful long-term investment.”
Build a foundation
Real estate is booming, with several housing and commercial projects mushrooming in the urban areas and outskirts of the cities. A correct investment in this sector could be a good decision.
“Real estate is a good and safe investment option for young people, especially since they have enough time to repay home loans at smaller EMIs over longer tenures,” says Anuj Puri, chairman, Anarock Property Consultants. However, he adds a cautionary note saying that youngsters shouldn’t over-reach their budget at the outset of their career.
“Buying a home is a good way to ensure a safe and secure future, but you must also keep in mind various other investment plans that contribute to safety and security. In other words, real estate can be part of a well-balanced investment portfolio that also includes other instruments such as mutual funds, insurance and pension funds,” says Puri.
Monu Ratra, CEO, IIFL Home Finance, says that while the real estate market has its ups and downs, in the long run, it is also one of the most effective investments. “Not only does it appreciate in value, but it also gives you an asset, a place to live without paying rent. However, you must calculate the economics before buying a house, because that would be one of the most expensive investment you would make in your life,” he says.
Ratra adds that assuming an average investor is buying property from his or her own income, the affordability would be mostly less, compared to someone who has worked for 10-15 years before purchasing a house. “In a metro city, it would be ideal for youngsters to look at low-cost housing within the city or projects outside the city, so that the risk is lower,” he points out.
Ratra opines that every individual must do thorough research about the locality, the project and the builder before any purchase. “Don’t fall into the trap of false promises or buy controversial projects even if they are available at a much lower cost,” he cautions. Puri points out that you should not fall prey to predatory up-selling, where, for instance, the housing company or agents might ask you to get your interiors done from them. Stick to your set budget, do not over-leverage and keep real estate as part of a balanced investment portfolio. “Trust only RERA-registered projects by reputed developers and bargain hard to get the best possible deal, or allow a trusted property consultant to do this for you as they have better negotiation powers with developers,” he adds.
Stock It Up
Regarded as the most lucrative of all, stock market investments always grab the eyeballs of young investors. “The reason being that choosing between stocks and bonds is a tough feat. The stocks are risky, but promise higher returns whereas bonds assure the returns,” says Mahesh Shukla, founder of PayMe India.
To avoid any loss in stock investments or fraudulent schemes, the first thing that the investors should do is to gain full understanding of the stocks and the market trends/upheaval. “You should get well-versed with the art of value investing, you must identify the cheap stocks, and must be able to predetermine the potential risks and threats that come with a particular stock. This is a long term investment goal and stock-picking strategies are must-haves for the young investors,” says Shukla.
Talking about how should one go about selecting the right share/stock, Rachit Chawla, founder and CEO Finway, says that for long-term investment, you should look at equity as an asset class. “The investor should, however, be cautious against the steep valuations and thus follow ‘buy on dips’ strategy. If we look at the performance of Sensex over the last 10 years, it proves that an asset class has the potential to deliver the best over a long term equity.”
He further adds that while the flexi-cap funds and small or mid-cap funds should be considered as important factors, they should not be the only core holdings in the investor’s portfolio. It would be a good choice to go for one or two large-cap funds rather than three or four small ones.
Chawla opines that you should start with investing around 10 per cent of your earning or, in some cases, 20 per cent of your savings in stocks. “With experience, as you gain confidence in the market and get your market study and trends on point, then you can think of increasing the investment. It is never advisable to go beyond investing 25 per cent of the savings in stocks,” he explains.
Shukla also points out that from time to time, the investor should look at increasing the investment amount depending on the income, expenses, liabilities and market condition. “This would give you an idea of what market is like and would also help you improve your risk-taking capabilities,” he adds.
Talking about the best shares that youngsters can invest in, Shukla says that index mutual funds are a good way to go because number one, they are inexpensive and number two; they are not as risky as individual stocks. Moreover, they are automatically managed, eliminating any possibility of human error. “These investment plans are simple to manage for young investors because the risks are lower and returns are usually high,” he adds.
Chawla concludes by saying that millennials should not rely on a particular share, have a less diversified portfolio, or do business on their own without expert advice or help. Lastly, do not dive into a decision based on rumours only.
Be insured, stay assured
We often hear the elders convincing the younger generation to make an investment in insurance policies because it is an asset in the long run. However, many youngsters are of the opinion that they do not need to invest in them.
Ankit Jain, co-founder and CEO of Symbo insurance, says that the reason behind this is that the disposable cash in their hands gives the young people the power to purchase. “We are growing to be a more and more consumption driven economy. Hence risk protection and saving for old age is the last thing on our priority list. Another challenge is that insurance is perceived as an expense or tax saving instrument rather than risk protection solution. This leads to youngsters staying away from insurance,” says Jain.
However, he adds that youngsters need to understand the fact that it is actually a smart move to purchase life insurance in their 20s or early 30s, because the cost of life insurance at 40, would be almost twice as much as the cost at 25. When you buy insurance solutions early in life, the sum insured increases as the purchasing power goes up. “Young people should evaluate health and life insurance, depending on their family structure and income level,” says Jain.
“It is a very well regulated industry with clearly laid-down investment policies for insurance companies. The risk in any investment portfolio depends on the investment instrument that you choose. Therefore, you should ensure that the choice of insurance product is in line with your age and risk taking capability,” he advises.
Terms to know
Asset Class: An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations.
Buy on Dips: The concept of buying dips is based on the theory of price waves. When an investor purchases an asset after there has been a drop, they are buying at a lower price.
Cap Funds: A cap fund is a stock fund that invests in a broad universe of equity securities with no capitalisation constraints.
Index Mutual Funds: An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
