Many young investors are finding it difficult to manage their earnings on a daily basis. For a young graduate, the earnings start from at an average age of more or less in 25 years. But at this age, they are thinking very less about their next day of the life. They have high disposable income. And this spending habit has been inflated exponentially due to the introduction of several e-commerce websites in India.
I am not saying that all the young stars are of this nature obviously there are exceptions. I saw my colleagues and friends that there is a serious lack of knowledge or misconceptions how to invest or what are the steps of investing. Hence, I thought to write about this topic i.e. how should a 25-year youth invest in India. First of all, I want to say that there is no easy money and don’t expect that. Be disciplined and systematic which will be fruitful for you. You can also read some of the books on personal finance.
The following basic steps are to be taken care to build a better financial future:
If you have any dependent in your family or any of the family members are solely depends on your income, please be enough insured. 75% of Indian population is not covered by insurance. Out of them, many people are underinsured also. The insurance coverage should be at least 10 times of your yearly income. If you have an annual income of 5 lacs of rupees, ideally you should have the life insurance coverage of 50 lacs. The premium paid for the insurance can be deducted under 80C.
Also Read: Which Life Insurance Policy to Buy
Please take health insurance of your family members even if you are insured under the media claim policy issued by your employer. Take a family floater policy of coverage 5 lacs from any of the health insurance provider. The premium towards the health insurance shall be exempted from tax under 80D up to Rs 25000 and Rs 30000 in the case of the senior citizen.
Contingency amount equal to three to six months income should be in your savings account to take care of the emergency situation like during the job transition period or some personal emergency requirement. You may park it in somewhere else where it can be easily liquidated.
Now, How should a 25-year youth invest
After that, concentrate about the investment. Tax saving options are to be taken care first. Various tax saving instruments are:
- Provident Fund (PF)
- Equity Linked Savings Scheme (ELSS) – Mutual Fund
- National Savings Scheme (NSC)
- Voluntary Provident Fund (VPF)
- Public Provident Fund (PPF)
- Fixed Deposit etc.
- Primarily, there are two routes of investment, equity, and debt. The return from equity is linked with the stock market and not fixed. The risk is associated with this return. So, an individual can invest in equity if he or she wants to take some risks. Other way, the return from debt instrument is fixed and less risky as these are linked with fixed return instruments like government bonds, debentures etc. One can invest in the stock or equity market through brokerage firms and through Mutual Funds. The examples of debt instruments are PF, PPF, VPF, NSC, Fixed Deposits, Bonds etc.
- I am assuming a 25-year-old individual can take the moderate risk considering he or she has enough time build his or her portfolio. The investment allocation should be 25 % to debt instruments and 75% to equity instruments.
- Considering savings as 10% of the income, a person is able to save Rs 4000 per month. Out of that, 25% is RS 1000. If the person has the basic pay of Rs 20000, the contribution towards Provident Fund takes care the purpose.
- The remaining Rs 3000 is to be saved through equity. You can invest directly in the stock market. But immediately don’t rush through. Do the studies, follow some blue chip stocks initially, and understand the basics of the stock market. After a considerable amount of understanding, please start investing. If you are too lazy about all these things or simply you are not interested, take the route of the mutual fund. The experienced and qualified fund managers manage your money and invest in the stock market. Start with a diversified equity mutual fund which has a good track record over the years. Try to invest first and then spend the remaining amount which is rarely seen among this age group.
- You can invest in two ways in mutual funds i.e Systematic Investment Plan (SIP) and Lump sum. Always I prefer the SIP route if you are not a regular tracker of the stock market and hence, disciplined investing through this can help you to build a good portfolio. Another thing to keep in mind is to invest in a direct mutual fund which means no brokerage and results a better return.
Also Read: ELSS or PPF – Where to Invest for Tax Saving
Hope, this article can give you a fair understanding of how to approach towards the better financial future. If you have any queries, don’t hesitate to ask in this forum.