The twenties are the time when you start understanding the importance of saving, investment, and returns. This is the age when you start to have financial freedom and you slowly start taking responsibility for your own life.
So, if you have savings in hand, what’s the best way to invest and where? There is no particular rule that suits all investment strategies for an amateur investor.
Looking at the market trend today, mutual funds are one of the best investment opportunities for an individual who is in his/her early 20’s. You can take advantage of the capital market to create wealth. The earlier you start, the better it is.
In this article
Importance of Investing Early
The word ‘investment’ sounds scary, but it is the only way you can build a solid financial foundation. You should start investing for two big reasons:
- +To generate wealth for your future
- +To be able to save taxes by investing in tax saving schemes
You may start with equity investments as they offer highest returns. In your 20s, you are in a position to take more risk because of the long horizon of investments.
Not that you have to invest a big amount, you can start investing in mutual funds with just Rs. 500 per month and build wealth over time. Mutual funds always give better returns over a longer duration.
How to Save Tax
Under Section 80c of the Income Tax Act-1961, there are a variety of tax saving instruments available in the market which allow you to save taxes up to Rs 1,50,000 per annum.
You may start investing in one of the schemes, like Public Provident Fund (PPF), National Pension Scheme (NPS), Equity Linked Savings Schemes (ELSS) of mutual funds, etcetera.
Equity Linked Savings Schemes is an excellent option for the young as the minimum investment amount is Rs. 500. But if you can invest an amount of Rs.1000 per month through SIPs, you can get lucrative returns as well.
ELSS has given superior returns compared to NSC, PPF and Bank Fixed Deposits. It allows you to build your wealth through equity investments over a long period of time.
Why Mutual Funds Are Best for Young Investors
Some financial investments can be tricky to understand, but mutual funds are easy to research and buy, therefore they make good choices for young investors.
Since mutual funds hold many securities, such as stocks and/or bonds, it is possible to diversify money. You can also invest in more than one fund by dividing your savings.
Not much money or financial skill is required to buy mutual funds. There are many low-cost funds to start with.
Also, there are authentic websites like Groww that help you buy Mutual funds without a broker. You just need to open an account in Groww and can avail all help and advice online.
Things to Check Before Investing in MFs (Mutual Funds)
Young investors have an added advantage since they can stay in the market for longer and make investments less risk-prone.
Here are 5 things which a young investor should keep in mind before investing in MFs:
Define A Purpose
It’s always good to invest with a purpose in mind. For example, invest money towards a financial goal like wedding planning, child education or vacation. This will help you decide the amount of savings for your long-term financial goal.
Before investing, you should find out about the holding duration of different mutual fund categories, like liquid fund, debt fund, equity fund, hybrid fund, etc.
Know Your Fund
Every category of a fund has its own risks and rewards which are associated based on the holding period. Also, you must find out the repercussions, if you sometimes fail to invest as per the benchmark time horizon.
Tax Benefits of SIP
Check if the MF you are investing in is an ELSS fund.
An ELSS fund is a mutual fund that gives you tax benefits under section 80C. If you need tax benefits, this is a great option.
If you do not need any tax benefits, it is best to invest in mutual funds that are not ELSS funds.
This is because ELSS funds have a lock-in period of 3 years.
Mutual funds are considered to be a safe investment avenue, mainly because it gets regulated by SEBI. It implies that each company needs to maintain a minimum net worth to set up an AMC.
However, the investment made in any of the mutual fund schemes is subject to market risk. Therefore, you should read and understand the scheme thoroughly, before making an investment.
Want to Dig Deeper?
Sounds good so far? Obviously, you’d want to learn more. Learning about mutual funds is very – much easier than learning most other investment options that give such high returns. Go through this link to understand better: Mutual Fund for Beginners.
Start small but start now!
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.