Advice for youth – the best way to invest money

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‘Investment’, in an economic sense, means the purchase of any asset, not for immediate consumption, but with the expectation that it will generate wealth in the future. E.g. Buying a house you intend to live in is not an investment, but buying a house you give on rent, is.

Money investment Advice for Youth

In financial terms, an investment is an asset that will generate money for the foreseeable future, and / or be able to be sold later for a higher price than what it was purchased for.

So where should we invest money – once we have some, of course? The answer typically depends on the individual’s profile. Age is one of the most important factors, along with investment objectives.

For a typical youngster who has just entered the workforce, it is likely that this becomes a rather bewildering issue. You have just started making a decent monthly salary, and do not know what to do with it. It is likely that your family will push you to put the money into buying property, or worse, spend it on non-investment assets like cars or worse.

It’s a good idea to stop and take stock of where you are and where you want to be. As a general rule, the younger you are, the more money you should invest in risky investments like equities.

Now, investing in equities does not necessarily mean buying shares directly from the stock market, but can also cover investing through equity-oriented mutual funds. Unless you are already experienced in selecting stocks based on underlying quality, the mutual fund route is strongly recommended. Another thing to keep in mind is, that for a young person, it’s always beneficial to invest in the ‘growth’ option for a Mutual Fund, given that you do not need to regular inflow of money, and it is also more tax-efficient to opt for this. So, how much of your income should you be looking at investing in Equities? A thumb-rule is to opt for the “hundred-minus” rule – take your age, subtract it from hundred, and that’s the percentage of your income you should put into equities. (e.g. for a 25-year-old, {100-25=75}, so 75% of your savings (after mandatory expenses and insurance) should be invested in equity-oriented mutual fund schemes and shares. It is possible, however, that this might be a riskier strategy than most of us can palate, so I would also strongly advise balancing about forty per-cent of this with Corporate Fixed Deposits or Debt-oriented mutual funds.

Of the balance, it is generally advisable to divide the amount equally between Fixed / Recurring Deposits, Public Provident Fund (PPF) and Debt-oriented Mutual Funds.

Once your investment plan is in place, tracking it should be your next priority. A weekly update of the status and value of your investments is more than adequate. Even more essential is to not panic during times of volatile markets. If the Mutual Fund or stock you have purchased has been the result of proper research on your part, it is important to stick with it for a minimum of a six months before taking any hasty selling decision.

This does not mean not re-balancing your portfolio from time to time. As you grow older, the proportion of equity in your portfolio should reduce proportionately over time. Further, if any of your stocks or mutual funds is a consistent laggard over time, do not hesitate to sell and re-invest.

Another major investment option that I have not covered above is real estate. This is partly because it is a rather vast topic on its own, but also because whether to invest in it or not depends hugely on the pricing in the market. Many urban centres in India are now over-heated, with prices having no co-relation to market worth. Nonetheless, if a reasonable opportunity is available, where you are able to acquire a property without spending more than 25% of your monthly income as the Equated Monthly Instalment (“EMI”), it may be worthwhile to invest that proportion of your income into acquiring such property. Avoid reducing your other investments significantly for this, however. Ideally, even if you have started paying EMI’s on a property, your investments in equity should not reduce by more than half of the earlier levels, and your payments to PPF and RD should continue as is.

These are but some of the recommended steps that you can take as a young, earning member of a family to try and secure your financial future. Apart from this, allocating sufficient funds to life and medical insurance etc. will be covered in future articles.

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Kunal
Kunal is an ex-banker with a (largely self-proclaimed) flair for writing. He is an associate member of the Institute of Chartered Accountants of India and an MBA from Narsee Monjee Institute of Management Studies (NMIMS), Mumbai.

2 COMMENTS

  1. Informative piece of information with good research!! Online trading has become famous among everyone; professional investors, college students and other traders looking for quick gains. The article includes good discussion for best way to invest money,

    If you have knowledge of stock market and can perform analysis & research, it is good scope to invest in online stock market. Some online discount stock brokers like My Value Trade not just offer the cheapest brokerage fees, but also offer easy to use trade portal. Even a beginner can easily understand and trade with an ease.

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