Learning is a continuous process. It takes time to get a good grip of any new skill. Investing is one such skill that is no different. It also needs time to get it right. Just like any other skill, starting early would help you to fine-tune your investment instincts and help you make better choices. As you move forward in your investment journey, you learn more and inculcate a financial discipline which lasts a lifetime. Starting young enables you to plan and invest ahead of time. Investing consistently over time will ensure that your savings are there when you need them.
Among investment avenues, mutual funds have become a go-to option for a lot of young investors. In recent years it has gained the attention of investors as a trusted vehicle of investment. The question which is asked frequently is-How do I get started? How do I build a mutual fund portfolio? What mutual funds do I invest in? And so on and so forth.
Worry not; we have you covered. But first, Congratulations on starting young!
Why is starting early important?
By starting your investment journey early on in your life, you benefit from having time on your side.I t is not only beneficial for creating long term wealth but also inculcates financial discipline.
Creating wealth overnight is impossible. When you start investing early and stay put for a long time, power of compounding comes into play. Compounding effect helps investors earn potential returns on both the principal amount and on gains earned on previous investments. Thus, it helps you accumulate wealth over the long-term.
Before you jump on the bandwagon, however, you must have a clear idea of your income, expenses, and savings to decide on how much you can invest.
How much should I start with?
As you have just started earning the propensity to spend will be high. Therefore, set aside a certain amount every month for investments. A good thumb rule to follow is that at least 20% of your salary, before expenditure, should be invested. To make investments a habit, start an SIP and set the date closer to your salary date, that way your investments are taken care of as soon as you get your salary.
Know these three things before you start.
The three main aspects around which your investments should be planned are your investment horizon, financial goal that you are saving for and your risk appetite. Your investment horizon is the period over which you want to remain invested in a scheme and can be classified as short-term, medium-term, or long-term. Financial goals are personal objectives you strive to achieve as you move forward in life such as paying off a debt, saving for retirement, buying a car/property, etc. Last but not the least, your risk appetite dictates the amount of risk you are willing to take.
While it is certain that markets tend to move upwards in the longer term, but there will be short-term market blips and corrections. Your investment journey will also go through various market cycles. Young investors in their 20s and 30s have a longer investment horizon which gives their portfolio ample time to manage volatility effectively.
So, where do I start?
Start building your portfolio by first identifying your long-term, medium-term, and short-term goals.
For your long-term goals, we suggest you consider equity mutual funds. Due to the volatile nature of equities, these funds are comparatively high risk. But volatility is not something to be afraid of, rather it is to be managed prudently. Equity markets tend to perform well in the long term. So, when you remain invested in equities for a long period, they end up playing a huge role in the capital appreciation of your portfolio.
For medium term goals we suggest you consider hybrid funds as they offer a mix of equity, debt, and gold, among other asset classes. The presence of equity components in the fund offers the potential to earn higher returns. At the same time, the debt component of the fund offers stability of returns. By offering the best of both, hybrid funds aim to provide a cushion against market fluctuations. Gold can be used as a hedge against inflation further helping to reduce overall portfolio risk.
Lastly, for a short-term goal such as creating a contingency fund (which is often neglected by young investors) we suggest you consider low-risk debt funds like liquid and savings fund. They aim at capital protection along with reasonable returns.
The best part about starting young is you can plan your investment according to the different stages of life. Suppose you plan to marry in next 5 years or go for a higher degree in next 3 years, you can plan it in advance and invest accordingly.
Diversify, diversify, diversify
When it comes to any investment you must not put all your money in one basket. Every asset class has a different risk profile and they do not perform in tandem in a given period. When you invest in asset classes having low correlation, weak performance of one is offset by comparatively better performance of other. This is how diversification works. It reduces the overall risk of your portfolio.
We suggest you diversify your portfolio right from the beginning by investing in different categories of mutual fund schemes including equity-oriented, debt-oriented, hybrid funds, international funds, among others, based on your needs. However, limit the number of schemes you invest in. The idea is to build a healthy and efficient portfolio with adequate diversification.
For more professional guidance – it is also advisable to consult a financial expert or financial advisor before taking investment decisions.
What did we learn?
