I have orbited around sun 25 times. Most of my young friends are in the same age spectrum. Most of them are earning more than 700% of their parents’ first salary three decade back. India’s young generation is dynamic and full of passion, and is earning plenty of money. Now, most of you would not agree on this logic. But it’s true. Every time we feel insufficient money in our accounts because of our high expenditures and constant increase in prices.
I met n number of young people, and most of them are confused in their own investments. They have questions like, when to start? Where to put earned income? And How to initiate?
When to start? You can start at any time, but starting early will give you advantage of compounding. In blog [Why my batchmate should know this money management secret?], I have explained why one should start investing as early as possible.
Where to put earned income? If you think you can build large corpus by just putting your income in banks savings account, my friend you are doing ‘big mistake’. It would give you negative real rate of return in high inflation. [India is an emerging country and inflation would be high.]
How to initiate?
In simple language, one should consider these five steps before investment.
Step 1: Individual’s Risk level
When you visit a doctor they don’t give you medicine immediately, what they do is, they first check up your blood pressure and do few sample tests for particular disease.
In similar manner one should not directly jump to products, like bonds or equity or Fixed deposits etc.
First step should be to know Individual’s Risk level. If your advisor disagrees to do your risk assessment test and continue advising you without it, you better ask her to do so or you can change your financial adviser/financial planner. Risk assessment test should be done every year.
Step 2: Individual must have a Goal
After identifying your Risk level, move to further step. At young age very few astute could consider goals. Goals are like, to meet marriage expenses between the age of 25-30, child’s education expenses, dream Home or a car budget etc.
For example, Education expense for your child could be very high [Rs. 20 L – 75 L normally]. Some may arrange it through loans, and then debt becomes burden to your family. Some may have big bank balance, and it could be wiped out by high tuition fees. But all of us, young, can build education corpus for our child in the meantime.
If you don’t have goals, every one of us share mutual goal, Retirement goal. Everyone is going to retire some point in time, let’s plan for that goal. Retirement is common for working professionals and self-employed people.
Step 3: Identify your Investment vehicle
Now it’s time to choose right medicine. Investment vehicle should be considered according to your Risk level and Goals. Investment vehicles could be Mutual Funds, Bonds, Direct equity, Bank Fixed Deposits, Gold ETF etc.
All these vehicles have risk-return rewards. Through these products investor can make portfolio for a particulate goal.
It is preferable to have different portfolios for different goals. For example, if your age is 26 and you have a portfolio for a car in next 5 years, you must not mix it with your retirement goal portfolio.
Step 4: Re-balancing
Re-balancing is crucial. For example, you have a portfolio for a dream home seven years down the line. For high returns initially you build portfolio with equity products. What if at 6th year equity crashes? Your portfolio gets affected and reality of your goal gets into trouble.
To avoid this uncertain risk, an investor should re-balance it every year. For example, after 5 years convert portfolio from equity to debt funds [or when equity gives good returns - direct interest into debt funds]. And in 6th year convert it to ultra-liquid funds or bank RD.
And this is how at 6th year your dream home portfolio would be less risky.
Step 5: Take advice from professional Financial Planner
If you have right knowledge and understanding about financial products and its flavors, and time to track it then you don’t need professional help.
You have to ask this question to yourself. If answer is ‘no’ then you should prefer professional advice by paying minor fees. You will get free advice also, but quality comes with value, not price.
Money management is not a luxury it’s essential tool for efficiency.
Comment your issues in money management. And How do you overcome it?