Start
Early To Have Time On Your Side
Youth
can benefit from power of compounding by being disciplined and covering all
risks
In
financial planning, more the time one has on his/her side, the better it is for
the person to reach his/her financial goals. With time on your side, if you put
in place a well thought-out financial plan and you are disciplined in your
approach, it is highly likely that not only would you have less to worry about
your finances after your retirement but also through your working years, say
financial planners and advisors.
As a young, working person, there are some basic rules you need to follow. Here, we assume that since you are putting in place a good financial plan and you are willing to start early in your working life. According to Varun Jani, founder, Nextstep Financial Planners, one of the first steps is to be aware of the power of compounding.
Beauty of compounding
Although the concept of compounding has been explained several times, it would be prudent to revisit the same once more. For example, let’s suppose that with 30-35 years on your side, you invest Rs 5,000 every month soon after you take up your first job. Also, let us suppose you invest a major chunk of the money in stocks or equity mutual funds, and over the same period your blended return (that is returns from equity mutual funds and other investments) from your portfolio is 15% per annum. At the end of 25 years, your total corpus would be a little over Rs 1.62 crore.
However, if you had started five years later, that is instead of 25 years you had invested for 20 years, at the same 15% yearly rate of return, your total corpus would be nearly Rs 75 lakh.
So, you can start just five years earlier to more than
double your corpus. This is
the beauty of compounding, and every financial planner and advisor always advises a client to take advantage of this aspect of finance in one’s portfolio.
For this, one of the easiest ways is to go for a systematic investment plan (SIP) in a mutual fund scheme.
And if you have long years ahead of you to meet your financial goals, an SIP in an equity mutual fund is one of the most advised investments in the market.
A proper asset allocation plan
With your eagerness to start early, and backed by the knowledge about how the power of compounding could help you, the other basic rule is to have an asset allocation plan in place before you start the actual process of investing. “Young investors mostly have a high-risk appetite. But at the same time, they also have more time on their side. So they can invest more in equity funds,” said the Vadodara-based Jani. “However, every young investor should first decide their asset allocation taking into consideration their age, the investment horizon, risk-taking ability and their needs. So these are the major factors that should be taken into consideration while doing asset allocation for their investments,” Jani said.
Health and life covers
The other rules for young investors are to have adequate life and health insurance covers. A life insurance is taken when you have one or more people who are dependent on you financially. An adequate insurance cover would guarantee that the people dependent on you do not face any financial difficulty in case you are not around.
On the other hand, adequate health covers for you and the people who are dependent on you financially ensure that, in case of any medical problem and the resultant high expenses, the insurance would probably take care of it all or at least a substantial part of the same.
With medical costs in the country rising at a much faster rate than the general rate of inflation, such a health cover would ensure that you do not hit sudden speed-breakers in your planned investments and the financial plan that you have in place does not go awry.
Emergency fund
In case the medical cover you have does not meet all such expenses, you should also have an emergency fund in place. Under such a plan, your investments should be in extremely liquid assets and also in financial instruments that carry very low volatility, according to financial advisors.
Investment advisors point out that there are several other benefits of starting investments when one is young. Some of these include inculcation of a good savings habit, checking unnecessary spending and, finally, paving the way to a quality retired life.
As a young, working person, there are some basic rules you need to follow. Here, we assume that since you are putting in place a good financial plan and you are willing to start early in your working life. According to Varun Jani, founder, Nextstep Financial Planners, one of the first steps is to be aware of the power of compounding.
Beauty of compounding
Although the concept of compounding has been explained several times, it would be prudent to revisit the same once more. For example, let’s suppose that with 30-35 years on your side, you invest Rs 5,000 every month soon after you take up your first job. Also, let us suppose you invest a major chunk of the money in stocks or equity mutual funds, and over the same period your blended return (that is returns from equity mutual funds and other investments) from your portfolio is 15% per annum. At the end of 25 years, your total corpus would be a little over Rs 1.62 crore.
However, if you had started five years later, that is instead of 25 years you had invested for 20 years, at the same 15% yearly rate of return, your total corpus would be nearly Rs 75 lakh.
So, you can start just five years earlier to more than
double your corpus. This is
the beauty of compounding, and every financial planner and advisor always advises a client to take advantage of this aspect of finance in one’s portfolio.
For this, one of the easiest ways is to go for a systematic investment plan (SIP) in a mutual fund scheme.
And if you have long years ahead of you to meet your financial goals, an SIP in an equity mutual fund is one of the most advised investments in the market.
A proper asset allocation plan
With your eagerness to start early, and backed by the knowledge about how the power of compounding could help you, the other basic rule is to have an asset allocation plan in place before you start the actual process of investing. “Young investors mostly have a high-risk appetite. But at the same time, they also have more time on their side. So they can invest more in equity funds,” said the Vadodara-based Jani. “However, every young investor should first decide their asset allocation taking into consideration their age, the investment horizon, risk-taking ability and their needs. So these are the major factors that should be taken into consideration while doing asset allocation for their investments,” Jani said.
Health and life covers
The other rules for young investors are to have adequate life and health insurance covers. A life insurance is taken when you have one or more people who are dependent on you financially. An adequate insurance cover would guarantee that the people dependent on you do not face any financial difficulty in case you are not around.
On the other hand, adequate health covers for you and the people who are dependent on you financially ensure that, in case of any medical problem and the resultant high expenses, the insurance would probably take care of it all or at least a substantial part of the same.
With medical costs in the country rising at a much faster rate than the general rate of inflation, such a health cover would ensure that you do not hit sudden speed-breakers in your planned investments and the financial plan that you have in place does not go awry.
Emergency fund
In case the medical cover you have does not meet all such expenses, you should also have an emergency fund in place. Under such a plan, your investments should be in extremely liquid assets and also in financial instruments that carry very low volatility, according to financial advisors.
Investment advisors point out that there are several other benefits of starting investments when one is young. Some of these include inculcation of a good savings habit, checking unnecessary spending and, finally, paving the way to a quality retired life.
Partha
Sinha | TNN ETSWA 121127
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