There has been a remarkable increase in the number of young investors in the age group of 18-30 years into the Indian markets ever since the pandemic broke.
This group of investors is the biggest beneficiary of staying invested for the long term and reaping the benefits of compounding returns.
Compounding returns is a simple yet powerful concept where you earn returns not just on your principal amount but also on the accumulated interest that you have earned over time.
However, most young investors on the contrary start their investing journey in search of quick money and are often not patient enough to adopt a buy-and-hold strategy. Moreover, young millennials are also overwhelmed by all the information and advice that is available to them.
Here are some basic rules and hacks that all young investors must know before they take the plunge into the investing world.
Don’t wait till you have earned enough to invest
Young millennials often refrain from investing as they believe they do not have enough money to invest. Ideally, you do not need a significant amount to start investing and can start with as little as Rs. 500. It is more important to get started and invest in a disciplined manner to enjoy the benefits of compounding returns.
Prepare a budget
Millennials must be aware of their earnings and their expenditures before they start investing. Budgeting helps you keep track of all your incomes and expenses so that you know the amount of surplus you have with you to invest. Budgeting also helps you cut unnecessary expenses
A smart saving plan would be to opt for the 50/20/30 method where 50% of the money covers necessary expenses, 20% covers luxuries, and 30% forms savings.
It is advisable to divide these savings into two parts. One as an emergency fund to cover any unpredictable shortfalls. The other should be invested in instruments like mutual funds, ETFs, and equity, through SIPs where a regular payment reduces risk and financial burden.
Diversify investments
You should not put all your eggs in one basket. Similarly, you should not invest all your money in one asset class even if you believe that it will generate good returns for you. Diversification of investments based upon your risk appetite helps to balance returns as well as risk of the portfolio. A diversified portfolio can offer stable returns even if some of the investments are underperforming.
Avoid debt
Credit cards are a very enticing instrument, they allow people to spend more than they earn. Young people generally believe in “instant gratification” and “living in the moment” and often choose to indulge in overspending by paying through credit cards. Soon, the debt piles up and it becomes difficult to pay off.
Avoiding debt is the best policy, EMIs should not be a major part of the paycheck for an individual. Frugality comes in handy as it helps one to live within their means. Frivolous expenditure on luxuries should be curbed as much as possible so that one has sufficient surplus to invest in wealth generating options.
Investors who avoid debt and stick to their budgets are better off since they do not have to worry about outstanding payments. Debt taken to improve quality of life is good to an extent, after which it adds to the financial burden and diminishes investment ability.
Invest in low-cost ETFs
Exchange-traded funds or ETFs are passive funds that are similar in many ways to a mutual fund except the fact that they can be purchased and sold on a stock exchange. The underlying investment funds are generally invested in stocks passively mirroring the composition of indices. ETFs are particularly suited for young investors who can take exposure in equities through this passive investment strategy. ETFs are also very cost effective and can be traded on the exchange (unlike mutual funds). ETFs also offer diversification benefits through exposure to stocks from various sectors and market capitalizations.
Seek professional help
It can be overwhelming for seasoned investors to navigate the markets so it is only natural that new entrants feel confused. It is advisable to seek help from SEBI registered advisors who provide unbiased investment advice. This can help avoid mistakes in the early stages and help build confidence for young investors.
Ending note
These few hacks can be utilized to optimize the investment process for young investors. They need to take the leap and start investing their accumulated money. Investing wisely right from the start will help earn returns on investments and build sound financial health over time. It is important to think about the long term and not fall into traps. Controlling greed and not going after quick and easy money is paramount during the investing journey. Some investments may seem too good to be true and hence it is important to seek advice and undertake necessary research before investing. As rightly said by Mr. Warren Buffet – “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Disclaimer: This write up is solely for educational purposes.
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