Any one who is young and save as little as Rs 2,000 every month after meeting all his monthly expenses should start investing early.
Age and risk appetite
As they are very young he can afford to take greater risk than an older individual. Different investors have varying risk tolerance thresholds. A conservative investor with a low risk tolerance level will prefer to invest in debt funds. A person with a high risk appetite can invest in sector funds. The investor must match his risk appetite and goal with the right investment instrument.
Younger investors take more risks and prefer greater returns over stability or regular income. This is because younger people have more earning years ahead of them. This does not hold good for older investors who are closer to their retirement years.
Debt funds for a start
The main investing goal of a debt fund is preservation of capital and regular generation of income. Maximising returns while taking on high risk is not its primary objective. Here, the mutual fund's core holdings are fixed-income investments. Investing in debt funds is a better option than directly investing in debt products. This is because even in a bad patch the fund manager can churn the portfolio and seek to minimise the losses.
When the interest rates fall, the value of bonds in a debt fund manager's portfolio goes up.
The Reserve Bank of India's (RBI) next rate hike is expected to impact debt mutual funds. A hike in the repo and reverse repo rates is expected to push deposit and lending rates up. Investments in G-Sec funds and income funds do not look appealing, at least in the coming months. The NAVs of debt mutual funds are expected to take a beating in the increasing interest rate regime.
Diversified large-cap equity funds
For young investors looking for avenues to start investing, this is perhaps the best way to venture into capital market investments. Equity funds are mutual funds that invest principally in stocks. They are riskier than debt funds but exhibit superior riskadjusted performance, especially during upward bound markets.
Companies are usually classified as
Ø large-cap,
Ø medium-cap,
Ø small-cap or micro-cap,
depending on their market capitalisation. Market capitalisation represents the aggregate value of a company or stock. Large-cap companies are considered safer than small and medium cap ones because chances of their going bankrupt or disappointing investors are very slim.
Diversification or spreading investments is a risk mitigation strategy that ensures your investments are not completely wiped out in bad times. One must pick from the wide platter of diversified largecap equity funds offered by different fund houses, based on their past 3-5 year performance.
Systematic investment plan
One can invest his savings of Rs 2,000 in two monthly systematic investment plans (SIPs) of Rs 1,000 each. The regular investment habit makes you a disciplined investor and you further benefit from rupee cost averaging.
