The twenties is the time when you start experiencing financial independence. You are on your path to chase your dreams. This is the time when you start understanding the importance of various vital things in your life such as career, relationship and money.
When it comes to money, steps that you take in your 20s matter the most in attaining future goals. Investing in the twenties, no matter how small, plays a crucial role in building a sound financial future.
Smart money decisions and discipline can help you achieve financial success in your life.
The benefits of investing early in your 20s are many. Two main benefits of investing early are the power of time and the magic of compounding effect on your investment.
It is important to develop good saving and spending habits in your 20s to grow your money.
6 Steps to grow your money in your 20’s:
- Create Budget and Regular Review:
- Identify and Set Financial Goals:
- Set Aside an Emergency Fund:
- Insure Adequately:
- Plan your Investments:
- Track your Progress:
- Investing mistakes to avoid in your 20’s:
- Potential Investment Options to Consider During your 20s:
To start investing, here is a simple investment guide for beginners or some vital tips for amateur investors
1) Create Budget and Regular Review:
Budgeting helps you have control over your finances. Based on the cash inflows and income, you can categorize your expenses for the month and create a spending plan.
Actionable: List out fixed expenses such as rent, utilities and loan payments, etc. List out your variable expenses such as gas, clothing, groceries and entertainment, etc which may change month on month. When you have a clear plan, you can prioritize your expenses, plan your savings with leftover money and adjust your spending habits, if necessary.
Takeaway: It is also important to have a regular review of your budget plan to stay on track.
2) Identify and Set Financial Goals:
As a career and personal achievements are the centers of attention in your 20s, financial goals may seem like the last thing to focus on. However, these are the most important goals to be set in the early ages of your career to lead a happier and stress-free life later.
Actionable: First thing is to identify and then categorize your financial goals based on the time horizon. Your short-term goals can be saving for an emergency fund, saving to pay off your student debts or for a wedding. Medium-term goals would be purchasing a car or going on a luxury vacation. Long-term goals would be owning a house and planning for retirement, etc.
Takeaway: Achieving financial goals needs a lot of planning. Luck or magic has no role in achieving your financial goals. Identifying and setting up financial goals helps in establishing a concrete plan for future financial independence.
3) Set Aside an Emergency Fund:
Life is uncertain and unpredictable. Unpleasant surprises like medical emergencies can crop up anytime, which may either pile up your debt or eat away your existing savings if you are not well prepared.
Actionable: Next on the list as an investment guide for beginners is to set aside at least six months of your income as an emergency fund.
Takeaway: Along with availing of insurance protection, both life, and health, it is important to have an emergency fund to meet immediate requirements.
4) Insure Adequately:
With the change in lifestyle patterns and the rising rate of inflation, adequate life insurance, and health insurance coverage is paramount for anyone before planning finances.
Planning for health emergencies and other contingencies in life is extremely important to stay on track to achieve other milestones and long-term goals in life.
Adequate protection guarantees that the family is financially secured and ensures the standard of living is not compromised in any unfortunate circumstances.
5) Plan your Investments
Once you outline your goals, you can decide on where to invest your savings depending on how far you are from achieving the particular goal.
Actionable: You can set aside some amount of your monthly savings in recurring deposits or fixed deposit or debt mutual funds to meet your short-term goals. You could consider investing in some hybrid mutual funds to meet your medium-term goals.
Takeaway: Considering your young age, you can consider investing a larger portion into riskier and potentially high-return asset classes like equity mutual funds and direct equity for your long-term goals such as retirement.
6) Track your Progress
Tracking the progress of your investment portfolio is the key to successful financial planning.
Actionable: As you are investing early, you need to keep revising your financial plan depending on your life phases. Also, as your income increases and your family responsibilities increase, you would need to save more. Your goals will change with time and many goals may get added.
Takeaway: Hence, it is important to monitor your investments, track the performance, look for new investment opportunities and review your financial planning from time to time.
Before moving towards financial mistakes you should avoid, Ask yourself this 5 Questions before Financial Planning
7) Investing mistakes to avoid in your 20’s:
Investing early, in your 20s, no matter how small, is extremely important to create significant wealth to secure your future dreams as it leaves you with a wider investment horizon.
The most common mistake that everyone in this age makes is investing too conservatively, which is just saving aside the extra money in safer investment options like fixed deposits or just keeping it in the bank account.
Taking the right, bold and wise investment decision is equally important. Taking a considerable amount of risk as you are investing easy can-do wonders to your investment portfolio in your later years.
As you have the advantage of the time by your side, you can afford to ride out market downturns and invest aggressively.
There are many investment options available in the market for investing beginners. Depending on your goal and time horizon to reach your goals, you can consider investing in a suitable financial product.
Though you don’t have to invest in all of the investment options available, you can diversify your investments into some of the good options available and suitable for your needs.
Let’s take a look at the potential investment options available for investing in your 20s.
5 MONEY TRAPS To AVOID In Your 20’s | Money Mistakes To Avoid In Your 20’s
8) Potential Investment Options to Consider During your 20s:
Where you invest your money should be based on your goals, the return that you are expecting, and when you need the money.
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A) For short-term goals
Short-term goals can be something that you need to reach in the near future such as buying an expensive gadget, wedding expenses, or setting aside money to pay off your student debt, etc.
To achieve such goals you need to have money in liquid form. Apart from keeping money idle in your savings account, you can invest in some of the short-term investments that can yield you considerable return in a short term.
Investing in some of these fixed-income instruments not only gives you liquidity to achieve short-term goals but also adds stability to your investment portfolio.
Some of the most common investment options as an investment guide for beginners are:
i) Recurring Deposits
Recurring deposits allow you to set aside a small amount each month. You have to deposit a fixed amount of money each month to your recurring deposit account for a chosen tenure.
You can earn interest at the rate applicable for that tenure, which may vary from bank to bank.
Current Rate of Interest:
Currently, the rate is 5% to 7% p.a. (1 year to 5 years and above). You can start RD with as low as INR 100.
ii) Bank Fixed Deposits
A bank fixed deposit account or term deposit allows you to deposit a lump sum amount for a chosen tenure and earn interest at the applicable rate of interest. Tenure may vary from 7 days to 5 years and more.
Current Rate of Interest:
Currently, the rate varies between 5% to 7.5% p.a. depending on the tenure chosen and the financial institute.
Term deposits are offered by Public and Private sector banks, small finance banks and NBFCs (Non-Banking Financial Companies).
You can start a term deposit with a minimum of INR 5,000.
iii) Post Office Time Deposits
Post office term deposit works the same way as bank term deposits. You can earn interest at the rate applicable for the tenure chosen by you.
You have multiple lock-in periods ranging from 1 to 5 years to choose from.
Current Rate of Interest:
Currently, the rate of interest ranges from 5.50% to 6.70% (1 to 5 years).
iv) Short-Term Debt Mutual Funds
Unlike traditional investment avenues like fixed deposits and recurring deposits, debt mutual funds are market-driven and can also offer stability, liquidity and a relatively higher return on your investment.
Mutual funds are an ideal investment tool for investing beginners irrespective of the risk appetite and time horizon to achieve various goals. There are a variety of funds available to suit your requirement.
For example, if you have an extra corpus which you may need to use in the next one or two months, you can park that money in liquid funds.
Rate of return:
The return may vary between 6% to 9% annualised return depending on the fund chosen and market conditions. You can consider low duration debt funds for 3 to 9 months away goals.
Money market funds can be best suited for something that you need to achieve in the next 12 months. The return may vary between 5% to 8% annualised rate depending on the market conditions and the fund chosen.
You can consider investing in short duration mutual funds for a one to three years period.
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Let’s take a look at the performance of the short duration mutual funds.
|Short Duration Funds||1 Year Return||3 Year Return|
|Axis Short Term Fund-Direct (G)||7.90%||9.40%|
|Edelweiss Bank & PSU Debt – Regular (G)||7.70%||10.60%|
|Tata Short Term Bond Fund – Direct (G)||7.50%||6.90%|
|IDFC Bond Fund -STP – Direct (G)||7.10%||9.10%|
|Axis Short Term Fund – Regular (G)||7.10%||8.60%|
B) For Medium Term Goals
Medium-term goals range from three years to five years. This could be saving for your children’s school fees if you are married or down payment to your first dream home.
You may not be looking for high-return investment options here. Though you can take some degree of risk, stability would also matter to remain the best for your medium-term goals.
As an investment guide for beginners, here are some investment options to consider.
i) Monthly Income Schemes
India Post offers monthly income schemes which disburse monthly income and is locked in for five years. The investment can start with a minimum of INR 1,500 to a maximum of INR 4.5 lakhs.
Current Rate of Interest:
Post office MIPs currently offer an interest rate of 6.6% p.a. Interest rates are revised from time to time.
These schemes are government-backed thus provide sovereign guarantee and steady return.
You can invest your yearly bonuses earned (corpus) into monthly income plans and then reinvest the interest earned monthly into high-return investment options like equity mutual funds and into direct equities in order to achieve your long-term goals.
Let’s say you are 25 and you have a corpus of INR 2 lakhs earned as incentive and bonus and you decide to invest that in the Post Office Monthly Income Scheme as you would need the money by the end of 5 years.
You would be getting paid interest of INR 1,100 every month for next year. Let’s assume you invest that 1,000 in an equity mutual fund through a systematic investment plan route.
You would be investing a total of INR 60,000 over the next 5 years. Let’s assume the equity fund gives a return of 12% CAGR, your total investment value would stand at around INR 82,000 at the end of 5 years.
ii) 5 years National Savings Certificate
National Savings Certificate (NSC) is a government-backed fixed income bearing scheme.
Current Rate of Interest:
Currently, the rate of interest is 6.8% p.a., subject to change from time to time. Interest in NSC is compounded on an annual basis.
NSC is a low risk and tax-efficient investment option that is suitable for small and medium-income investors. You can open an NSC account at a Post Office near to you.
Investing in the National Savings Scheme also gives you tax benefits under Section 80C of the Income Tax Act, 1961.
You can start a National Savings Certificate investment as low as INR 1,000.
Let’s say you invest INR 50,000 in NSC, you would receive INR.69,475 at the end of 5 years on maturity at a 6.8% p.a. interest rate.
iii) Medium Duration Debt Funds
Medium duration debt funds invest in debt instruments for medium-term time frames, say between 3 to 5 years. The degree of risk in these funds ranges from low to medium depending on the fund chosen and the instruments in which it invests.
Though returns are not guaranteed, they are reasonable for a medium-term tenure.
|Medium Duration Debt Funds||1 Year Return||3 Year Return||5 Year Return|
|HDFC Medium Term Debt Fund – D (G)||10.90%||9.40%||8.80%|
|ICICI Pru Medium Term Bond (G)||10.50%||8.70%||8.10%|
|Axis Strategic Bond Fund – D (G)||9.80%||9.00%||9.00%|
|ICICI Pru Bond Fund (G)||7.30%||9.30%||8.10%|
|Nippon Income Fund – Direct (G)||5.30%||10.30%||8.90%|
iv) Hybrid Funds
Hybrid funds invest in a combination of two or more asset classes. Apart from equity-debt combinations, part of the corpus sometimes is invested in gold and real estate too.
Hence, hybrid funds provide the best diversification to your investment portfolio.
The risk in this investment may range from Conservative to moderate to moderately high depending on the asset allocation of the fund chosen.
Let’s take a look at some of the best performing funds in the category:
|Hybrid Funds||1 Year Return||3 Year Return||5 Year Return|
|DSP Equity & Bond Fund-Regular (G)||50.10%||12.80%||14.10%|
|SBI Equity Hybrid Fund – Direct (G)||46.80%||13.10%||14.20%|
|CR Equity Hybrid Fund -DP – (G)||45.60%||14.60%||15.80%|
|CR Income Saver Fund -D (G)||20.40%||11.70%||10.50%|
|SBI Equity Hybrid Fund – Regular (G)||45.80%||12.30%||13.30%|
C) For Long-Term Goals
For the long-term goals that are many years ahead such as retirement, you can consider investing in high risk-high return investment options as that can provide you inflation-adjusted returns.
However, when you are planning for your finances, it is important to plan your taxes along. The tax efficiency of any investment option also needs to be evaluated to make the right investment choices for you.
As an investment guide for beginners, here are some potential investment options for your long-term goals.
i) Equity Mutual Funds:
Mutual funds are the ideal tools to invest in the equity market as you can have the benefit of professional management, diversification and a disciplined approach at the same time. The selection of funds is extremely important.
You can take a quick online free course of Koppr on mutual fund basics to learn how to invest in mutual funds for beginners.
As an investing beginner, systematic investment plans are the best way to invest in equity mutual funds as it allows you to set aside systematically on a monthly basis. You can with as low as INR 500 monthly.
Equity funds come in many types depending on the market capitalisation, tax benefit it offers and investing style etc. Some of the top-performing equity funds are:
|Equity Mutual Funds||1 Year Return||3 Year Return||5 Year Return|
|Tata Large Cap Fund – Direct (G)||67.10%||12.20%||13.90%|
|UTI Flexi Cap Fund -Direct (G)||77.40%||17.10%||17.60%|
|Mirae Emerging Bluechip Fund -Direct (G)||84.60%||20.10%||22.50%|
|Tata Mid Cap Growth -Direct (G)||80.60%||16.10%||17.30%|
|JM Tax Gain Fund – Direct (G)||76.30%||13.50%||18.00%|
ii) Direct Equity
Equity as an asset class over the long run is considered to provide the highest return. Considering the potential for high return, your early investment portfolio should have some corpus into direct equity for wealth creation in future.
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Unit linked investment plans are the hybrid investment options that provide insurance benefits as well as investment elements.
Part of your premium is invested in the various market-linked funds in a proportion chosen by you. ULIPs come with a host of other benefits and are tailored to your specific needs.
ULIPs are one of the best tax-efficient investment plans that have a higher potential for wealth creation.
iv) Public Provident Fund
To add stability to your long-term investment portfolio, you can consider investing in a Public Provident Fund. PPF is government-backed and comes with a lock-in period of 15 years.
You can start with a minimum investment of INR 500 to a maximum of INR 1.5 lakhs. PPF is a tax-efficient long-term investment option that offers a fixed rate of interest (currently 7.1% p.a.).
Apart from these investment options, there are plenty such as retirement/pension plans, conventional saving schemes offered by insurance companies, gold ETFs and many more.
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Choosing the right mix of investments is as important as investing. As you invest in your 20s, you have the advantage of time and the power of compounding.
With the increasing income and change in life phases, it is important to refine your investment strategies more often as you need to keep reviewing your goals and changing needs.
As you progress, you can take help from experts such as Robo advisors. Boosting your financial literacy with time is a must. You can take an effective and quick online course of Koppr on early financial planning to start it right!
Start early and invest wisely!