Investing At 25: A Guide For Indians

Investing in your 20s can be a daunting task, especially with the wide range of investment options available and the various strategies to choose from. However, starting early in life gives you a key advantage: time. Here are some tips for 25-year-olds in India who want to start investing:

- Start investing immediately: The most common mistake young people make is delaying their investments. While it may seem like there is enough time to reach financial goals, waiting can make achieving them more challenging later on.

- Learn the basics of personal finance: Focus on understanding essential financial principles, such as financial metrics, budgeting, and saving. This will help you make more informed investment decisions.

- Set financial goals and plan your investments: Define your short-term and long-term financial goals, such as building an emergency fund, saving for retirement, or buying a car or a house. Then, create a financial plan by considering the investment tenure, amount, and product.

- Save first, then spend: Encourage yourself to save by setting aside money for investments before spending on anything else. Even small amounts saved and invested regularly can help you get closer to your financial goals.

- Take advantage of the Employees Provident Fund (EPF): Salaried individuals in India can benefit from the EPF scheme, a retirement account where both employee and employer contributions earn interest.

- Diversify your investments: Spread your money across different types of investments, such as stocks, bonds, or debt instruments, to minimise risk and maximise returns.

- Make risk your friend: Don't be afraid to invest in stocks, as they have historically provided higher returns over the long term compared to lower-risk, lower-return investments.

- Invest in low-cost index funds or ETFs: Consider investing in index funds or exchange-traded funds (ETFs), which hold a variety of investments and are designed to mimic the performance of a specific market index.

- Get help from a financial advisor: Consider seeking advice from a professional financial advisor or using a robo-advisor, a computer-based investment management service, to help you make more informed investment decisions.

Start investing immediately

Starting to invest in your 20s can be daunting, especially with the wide range of investment options available and the various strategies to choose from. However, the most common mistake that individuals in their 20s make is delaying their investments. Here are some reasons why you should start investing immediately:

• Time is a key advantage when it comes to investing. The earlier you start, the more time you will have to grow your wealth and reach your financial goals. Even small investments can grow into substantial amounts over time, thanks to the power of compound interest.
• Enrolling in a retirement plan, such as the Employees Provident Fund (EPF), is a great way to start saving for the future as soon as you start earning. Contributing to a retirement plan can also provide tax benefits.
• Starting a Systematic Investment Plan (SIP) in a Mutual Fund is another simple way to begin investing. With a SIP, you can invest a specific amount of money regularly, such as Rs. 500 per month, and watch your money grow over time.
• By investing early, you can take advantage of your age and tolerance for risk. Younger investors are better equipped to handle the ups and downs of the stock market and can afford to take on more risk, which can potentially lead to higher returns.
• Investing early allows you to develop good financial habits and gain a better understanding of personal finance. This knowledge will benefit you not only in your 20s but also as you progress in your investment journey.

Learn the basics of personal finance

In India, money, investing, and personal finance are not typically taught in schools, so it's up to individuals to educate themselves on these essential skills. Here are some key principles to help you get started on your financial journey:

• Start investing early: The earlier you begin investing, the more time your money has to grow. Many people in their 20s delay investing because they believe they have ample time to reach their financial goals. However, this delay can make achieving those goals more challenging in the future.
• Understand basic financial principles: Focus on grasping key concepts such as financial metrics, budgeting, and the time value of money. This foundation will help you navigate more complex topics down the line.
• Set financial goals and create a plan: Define your short-term and long-term financial goals, such as building an emergency fund, saving for retirement, or purchasing a house. Then, develop a plan by considering factors like investment tenure, amount, and product (equity, debt, or other asset classes).
• Save first, spend later: Prioritize saving and investing over spending. Even if you can only save a small amount each month, it will help you progress toward your financial goals.
• Automate your investments: Consider using Systematic Investment Plans (SIPs) to automate your investments. SIPs allow you to invest a specific amount regularly, helping you build wealth over time through the power of compounding.
• Take advantage of employer-provided plans: If you're a salaried employee, contribute to the Employees Provident Fund (EPF) scheme, which is a retirement account where both your contributions and your employer's matching contributions earn interest.
• Avoid common money mistakes: Be mindful of pitfalls like not budgeting correctly, depriving yourself of occasional treats, accumulating debt, not increasing your income, and being too generous with your money.

Set financial goals and plan investments

Setting financial goals and planning investments is a crucial step towards achieving financial success. Here are some tips for individuals in their 20s, especially those in India, to set financial goals and plan their investments effectively:

• Start with basic financial goals: It is essential to set realistic and achievable financial goals. Basic financial goals for individuals in their 20s may include setting up an emergency fund that can cover 9 to 12 months' expenses, saving a certain amount by a specific age (e.g., Rs. 1 crore by 30 years of age), and starting retirement savings with a target corpus by retirement age (e.g., Rs. 10 crores by 60 years of age).
• Consider different types of goals: Beyond the basic financial goals, individuals can also incorporate other goals such as purchasing a house, planning for annual vacations, or allocating funds for children's education expenses as they progress in their careers.
• Determine the investment tenure, amount, and product: To create a comprehensive financial plan, it is crucial to consider the investment tenure (how long the investment should be made), the investment amount (how much to invest), and the investment product or asset class (such as equity, debt, or other investment options).
• Save first, then spend: This approach encourages individuals to prioritise saving and investing over spending. By setting aside money for investments first, individuals can ensure they are working towards their financial goals. Even small amounts saved and invested regularly can make a significant difference over time.
• Long-term goals require a different strategy: Long-term financial goals, such as buying a house, saving for children's education, or retirement planning, require substantial amounts that can run into crores. To achieve these goals, it is advisable to invest a more significant proportion of your money in equities. The asset allocation formula can be used to determine the percentage of investments in equities: % Allocation in Equities = (100 – Investor’s Age). For example, if an investor is 26 years old, 74% of their investments should be in equities.
• Automate your investments: Automating investments simplifies the process and helps individuals stay disciplined in their investment journey. Systematic Investment Plans (SIPs) in mutual funds are a popular way to automate investments. SIPs allow individuals to invest a specific amount regularly, purchasing units of a mutual fund on a set date each month. Starting with small amounts, such as Rs. 500 per month, can help build a substantial corpus over time due to the power of compounding.
• Take advantage of employer-provided retirement plans: Salaried individuals in India can benefit from the Employees Provident Fund (EPF) scheme, where both employee and employer contribute a portion of the employee's salary each month. The contributions earn interest, and the employer's matching contribution effectively increases the employee's savings. Maximising contributions within the allowed limits can help individuals build a solid retirement fund.

Save first, spend later

Saving first and spending later is a great strategy for those in their 20s who are looking to start investing. This is because, in your 20s, you are likely to have more time to grow your wealth and reach your financial goals.

It is a common mistake for individuals in their 20s to delay their investments, often due to the belief that they have sufficient time to achieve their financial goals. However, this delay can make achieving these goals more challenging in the future.

By focusing on saving first and spending later, you can encourage yourself to set aside money for investments. Even saving a small amount each month will help you get closer to your financial goals. Additionally, putting savings first allows you to make small and manageable changes to your daily expenses without requiring a significant lifestyle change.

For example, if you are in your 20s and want to buy a house, save for your children's education, or plan for retirement, you will need to invest a more significant proportion of your money in equities. One way to determine how much to invest in equities is to use the asset allocation formula:

% Allocation in Equities = (100 – Investor’s Age)

So, if you are 25 years old, 100 – 25 = 75% of your investments should be allocated towards equities.

However, it is important to note that equity investments can be more volatile than debt instruments or fixed deposits. Nevertheless, historically, investments in broad market indices such as the NIFTY 50 or BSE SENSEX have never given negative returns if held for at least seven years.

While it may be tempting to invest in riskier instruments such as cryptocurrencies, futures, options, or stocks, it is crucial to understand the key risks involved before investing.

Starting to save and invest in your 20s can lead to a stress-free financial life. In addition to equities, there are several other investment avenues you can explore, such as post office savings, Public Provident Fund, Liquid Funds, Recurring Deposits, Systematic Investment Plans (SIPs), Debt Funds, and Life Insurance.

By saving first and spending later, you can take advantage of the power of compound interest and give your investments more time to grow. This strategy will help you build a strong foundation for your financial future.

Take advantage of the Employees Provident Fund

The EPF is a mandatory savings scheme for salaried individuals in India, and it can be an incredibly powerful tool for 25-year-olds to begin building their financial future. The EPF offers a unique opportunity to save for retirement, providing a substantial corpus over time due to the power of compound interest. Here's how you can maximize this benefit:

Understand the EPF:

The EPF is a retirement benefit scheme that falls under the purview of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. Both the employee and the employer contribute 12% of the basic salary (plus dearness allowance, if any) to the EPF account. These contributions are then invested, and the accumulated balance can be withdrawn at retirement or when changing jobs. The interest rate on the EPF is decided by the government and is typically higher than that of a bank savings account.

Max out Your Contributions:

Ensure that you are contributing the maximum allowed percentage to your EPF. While the mandatory contribution is 12% of your basic salary, you can choose to contribute more. This is especially beneficial if you start early, as the compound interest will have a more significant impact over time. The maximum allowable voluntary contribution is 100% of your basic salary, and it can help boost your retirement savings significantly.

Leave It Untouched:

Resist the temptation to make premature withdrawals from your EPF account. The power of the EPF lies in long-term, uninterrupted growth. Withdrawals made before retirement can attract penalties and reduce the final corpus. If you change jobs, ensure you transfer your EPF account to your new employer instead of withdrawing the money. This will preserve the tax benefits and continue the growth of your savings.

Take Advantage of Tax Benefits:

Contributions to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. This means that you can reduce your taxable income by up to ₹1.5 lakhs per year by investing in the EPF. Additionally, the interest earned on your EPF balance is tax-free, providing further financial advantages.

Opt for the EPF If You're Self-Employed:

Even if you are self-employed or running your own business, you can still take advantage of the EPF. The EPF scheme is open to owners of private companies, partners in firms, and trustees of trusts. This allows you to enjoy the same benefits as salaried individuals and build a substantial retirement fund.

By maximizing your contributions, taking advantage of tax benefits, and letting your money grow uninterrupted, you can ensure that your EPF plays a pivotal role in securing your financial future. Starting at 25 gives you a significant head start, and the power of compound interest will work in your favor, setting you up for a comfortable retirement.

Frequently asked questions