Starting on your first job? Avoid fads, begin saving and investing early

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The thrill of getting your first pay check is quite something. But the temptation to spend it quickly is also there. After all, you are no longer dependent on your parents’ pocket money.  It’s fine if you splurge initially, but cultivating some good savings habits early in your career can make you a better investor in future.

Are savings enough?

No. Savings merely mean you are keeping your money aside, but idle. “Investing is about keeping aside a part of your income for a long-term investment,” says Kalpesh Ashar, certified financial planner at Full Circle Financial Planners and Advisors. He says it’s important to understand this key difference early on.

Start by setting aside 20 percent of your take-home pay, Ashar suggests.

If you start investing Rs 1,000 a month in an equity fund via a SIP (systematic investment plan) from 23, you’ll end up with Rs 82.75 lakh when you retire at age 60 (assuming 12 percent annual returns). But if you delay investing by seven years and start investing at age 30, you’ll get only Rs 35.30 lakh. Your loss opportunity loss is Rs 47.45 lakh. Think of what you could have bought with that money.

Everyone is talking about cryptocurrencies

Yes, cryptocurrencies have gained popularity in recent months and several youngsters have started to invest in them. But if you are in your first job, avoid cryptocurrencies. They’re risky, sophisticated and you need to read up a lot before you can tell the difference between one cryptocurrency from another.

“A lot of youngsters get drawn to cryptocurrencies, driven by super-high returns. Typically, such investments are meant for savvy investors who are willing to lose significant capital. For newbies, it is best to gain experience in investing by starting with equity mutual funds and Public Provident Fund (PPF), says Mrin Agarwal, Financial Educator, Money Mentor and Founder of Finsafe India.

Must you invest online?

You could either get in touch with a distributor or a fee-based financial planner, if you can afford one. A distributor asks you simple questions like how much risk you can withstand, the reasons you’re saving for and so on. Then, she recommends a list of mutual funds, small-saving instruments and then you’re set. She helps you fill forms, keeps you abreast with your account statements, and so on.

Alternatively, there are several online web portals that allow you to invest in mutual funds. Opening an account with them is as easy as opening an email account and fulfilling the Know-Your-Customer (KYC) requirements. All online portals allow you to set up an SIP wherein money flows out of your bank account and into your MF schemes, automatically, every month. You can also top up your investments in the same set of schemes, if and when you wish to invest more.

You can invest in PPF and fixed deposits through your internet banking facility.

Save on taxes

Financial planners say that first-time salary earners often get introduced to savings through income-tax planning. During the months of January through March, every salaried employee is asked to submit proofs and statements of expenses and investments made that’ll help them save taxes.

Invest in an equity-linked savings scheme (ELSS). These mutual fund schemes give you income tax deduction benefits under Section 80C. “ELSS gives you a taste of equities and saves taxes,” says Dev Ashish, founder of StableInvestor.com.

Nisreen Mamaji, a certified financial planner and Founder of MoneyWorks FS says that ELSS comes with a 3-year lock-in, as opposed to a Public Provident Fund (PPF) that comes with a 15-year tenure. “After three years, if you haven’t allocated this money for a long-term goal, you can use it. Else, you can continue to stay invested,” she adds.

Where should I invest?

Ideally, you should have a mix of equity and debt instruments in your portfolio. The reality is that most first-time earners don’t have long-term plans. Some continue in their careers. Others, says Mamaji, take a sabbatical after 2-3 years to pursue higher education. Committing money for the long run is a challenge.

Start off by investing some money in a liquid mutual fund. This serves two purposes. It acts as your contingency corpus. Liquid funds grow slowly and steadily and you can withdraw almost instantly. A contingency corpus is a must to take care of any emergencies. Also buy yourself a good health insurance cover from your first few salaries. The higher the cover, the better – a sum assured of at least Rs 10 lakh is a must.

Without a health cover, you can end up with a huge hospital bill, which can eat into your savings and hurt your ability to invest.

If you have education loans, focus on foreclosing your loans soon to save on interest payouts.

Once you spend a few years in your job, you can top-up your investments and SIPs and add a few more mutual fund schemes.

Disclaimer: The views and investment tips by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.