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| The Age Advantage |
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Rattan Chugh
ExpressMoney
Monday, September 11, 2006 at 0936 IST
The earlier you start investing, the earlier it will be for you to reach that magical fugure of Rs 1 crore with a small commitment each month
A 27-year-old asks me whether she needs a financial plan at her age, when she can save only Rs 1,000 a month. The three questions youngsters like her should address. One, why should I save in my 20s? Two, how much should I save? And three, how should I plan my savings? Let’s explore these questions through her lens. |
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| Why save? |
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Typically, in our 20s, we step out of our parents’ shadow and move from limited resources obtained through pocket money to getting on our own with a salary that gives us the power to spend more freely. In fact, access to credit cards lures some of us to overspend. |
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But with freedom comes responsibility. Firstly, the Indian economy is becoming more market driven and job security is becoming a thing of the past, so you need to be ready when your career hits a rough patch. Secondly, age is on your side. You can ben-efit from ‘the power of compounding’ and build sizable assets over time. In the first year, the money you invest works for you and earn returns. From the second year, both, fresh and existing investments fetch returns. With every passing year more money works for you and your kitty gets bigger.
For example, if you put aside Rs 5,000 every month, say in, equities (assuming a return of 13 per cent compounded annually) and increase that amount by 10 per cent each year in sync with increase in your salary your kitty would swell to over Rs 1 crore in 20 years (See table: The power of compounding). |
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 How much?
Savings potential is linked with personal situations. So, if you have an education loan to repay, your potential to save will reduce. That said, you should aim to save 25 per cent of your income to cater to your medium to long-term goals, and meet your expenses from the remaining 75 per cent. Around 10-15 per cent of your compensation will, in any case, be put aside as retirals employees’ provident fund and superannuation which means you still need to invest 10-15 per cent of your take-home. |
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| How to Plan? |
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There are some important questions to consider in building your investment strategy: Do you have a target to meet, like funding your marriage, buying a house or saving for retirement? What is the time horizon and how much would you need? What is your risk appetite? Although you are a long-term investor, would you be overly concerned about fluctuations in the markets ? |
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Once you’ve answered these questions, choose a suitable asset allocation strategy. You can go for equities, which tend to give high returns with higher risk, debt products, which have lower returns and lower risk, or a mix of both.
You could also adopt a different asset allocation strategy at various stages. At the early stage, since time is on your side, you can go for high-risk, high-return assets, gradually move towards low-risk assets as the target date gets nearer and eventually towards low-risk asset classes in the last year.
Last but not the least is to avail of the tax benefit. Investments of up to Rs 1 lakh per annum in PPF, insurance, bank deposits and ELSS, among others, are tax-exempt under Section 80C. Each product has its own lock-in and you need to check if liquidity concerns you.
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So start now and have a disciplined approach to saving and you will be able to accumulate assets to take care of your mid- and long-term financial goals. |
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