The earlier you begin investing, the higher will be your returns through your lifetime
Traditionally, the domestic market has a high level of household savings. It is advisable to start saving and investing in carefully-selected investment instruments as soon as possible in your earning years. There are many investment options available in the market and sometimes it is quite confusing for new investors to select the right investment instruments to invest their hard-earned money in.
Each investment instrument is designed to serve a definite objective and therefore, a fresh investor should take professional help to choose the right options, based on his requirements. It is very important for investors to identify various requirements and lock into a well-designed investment portfolio.
Here are some parameters you can consider while chalking out an investment plan:
Identify need
First of all, identify the broad requirements of funds in the short term (for example, support parents in marriage of brothers/sisters, own marriage etc), medium term (child's education, building a house etc), and in the long term (retirement/pension plans etc).
Tax planning
Taxes drain out significant amounts of money from your hands. Tax saving is one of the primary concerns of young investors. The first objective for young investors should be investing in tax saving instruments up to the maximum permissible limit.
Compounding effect
Money saved in the early part of life has more time to grow due to the compounding effect. Also, based on risk profile, young investors can look at exposure to good stocks and equity mutual funds for better long-term returns.
Insurance
Investors should take adequate insurance cover early in life. If you buy an insurance policy early in life, the premium turns out to be much cheaper due to the low risk profile of the investor.
Liquidity
Another important aspect is to maintain a fair amount of liquidity in hand. You need to choose some instruments that return back your money prematurely without much penalty in order to cater to any short-term unexpected need of money.
Here are some options in investment instruments:
Investment instruments can be classified in multiple categories. Based on the individual investment plan, investors can look for instruments from each category to build their portfolio.
Saving tax
Provident funds (EPF, VPF, and PPF): Provident fund is one of the safest investment options. However, investments in provident funds come with long lock-in periods.
Tax-saving mutual funds: The lock-in is much lesser in tax-saving mutual funds with a decent riskreturn ratio.
Tax-saving deposit: Bank fixed deposits with this option and NSC etc provide greater safety but come with a lock-in period.
Home loan: A home loan provides a good relief to tax payers. However, investors should plan the other aspects of life before buying a house.
Pension plans: Investing early in pension plans gives better returns due to the compounding effect. Investments for returns Mutual funds: They come in multiple flavours. Blue-chip equity funds, midcap equity funds, balanced funds etc. Young investors can take advice from a professional. A systematic investment plan (SIP) is a good way to enter mutual funds.
Stock markets: Investing in the stock markets is much easier with the advent of Internet trading. However, young investors should invest their hard-earned money carefully with a longterm perspective.
Investors should not be drawn by lucrative short-term trading. Often, investors end up burning their fingers due to lack of knowledge, access to news and events, and risktaking capacity. Insurance
Life insurance: Life insurance cover is a must for every individual. Young investors can take an insurance cover of around 3-5 times their annual income. Investors should lock into an insurance cover early in life as it ensures lesser premium due to a lower risk assessment.
Medical insurance: Many companies provide medical cover for their employees. In the absence of such cover, young investors can think of taking medical insurance early in life to get better illness coverage at lesser premium.
Equity-linked savings scheme: They provide a good mix of insurance cover with an investment in mutual funds. Young investors should analyse various charges/fees of the scheme before taking an investment decision.
Start early
Every market analyst and expert says investors should start saving and investing early in life. Investing early gives time to your investments to grow by way of compounding and provides a cushion to absorb risks. However, it is equally important to plan your investments in multiple investment instruments carefully to get all round benefit and risk cover.
