how to invest at a young age

By: Aishwarya Agarwal & Naayl Humza

Graduates in their 20s must remember a simple rule, as specified in Robert Kiyosaki’s book, Rich Dad Poor Dad, “spend only that amount available post savings and investments – Pay yourself first!”

This payment to one’s self must be used for savings and additional financial asset purchases. The idea of dabbling in equity, debt and derivatives may be mind-numbing for many investors which often leads to them shying away from the avenues available in today’s financial markets. You could potentially spread your funds over multiple asset classes, the most common of which would be equity, mutual funds, debt, gold (and real estate if your available capital allows you to do so).

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The best part about starting at an early age is the compounding appreciation of your investment. It may seem like starting with small amounts may not be useful and you may delay it but the truth is that starting small can lead to big returns if they are given the time to grow. Most older people often complain how they started investing too late and now cannot reap the benefits of compounding. Eg: If you invest Rs. 1000 on 1st April 2004 (15 years ago) it would be Rs. 5,424 today. This is an increase of almost 543%. Now imagine if you invested Rs. 1000 every month for these years. This is why one must not shy away from investing at an early age no matter how small the amount.

Source: Tavaga Research

If one has understanding of the market they can invest in the stock market directly. One can start by buying different stocks every month and diversify their portfolio to make sure no single stock or sector has too much weightage. Thus would help you to stabilise your returns over the years and easily rebalance any sector or stock which is giving a bad performance or is bringing your portfolio down.

But what if someone is unsure and has no idea on how to invest in the stock market? Then they could look into instruments like ETFs (Exchange Traded Funds). ETFs or exchange traded funds are basically quasi-equity stocks that track the market index(example a Nifty 50 ETF would track the Nifty 50 market returns, as seen in the example above if you had invested the Rs. 1000 in the ETF you would have received a 543% appreciation in 15 years). They have a lower expense ratio than mutual funds, no commissions and are traded on the stock exchange. They provide asset diversification allowing spreading of risk.

Mutual funds can also be an option for such people given they understand how to pick the right mutual fund, even with mutual funds there is a constant need to rebalance depending on the performance. One cannot always rely on steady performance of their actively managed mutual fund, because over a period of time the fund manager will tend to underperform the market.

Additionally, you should also diversify your investment into debt instruments to have some form of fixed income such as in fixed deposits or bonds or debentures. You can also invest in funds that are fixed income, or invest in companies that announce dividends regularly to assure some form of  fixed income outside of value appreciation.

Once you learn how to invest in the market properly you can further diversify in more complicated instruments such as derivatives, but these are short term ploys and very risk. We would recommend you to stick to your long term investments in your financial instruments, and diversify into physical instruments when the need/ funds exist. Alternatively, invest in financial instruments that are backed by physical assets such as Gold ETFs (replicates gold prices) or REITs (Real Estate Investment Trusts, allow you to invest in real estate without the physical asset buying hassle); that way you can afford to diversify into these and buy them at lower prices and not have to bear the hassle of maintaining the asset.

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