Last Updated on May 27, 2021 at 10:14 am
A young earner asks, “I’m 22 and started working in an IT company 1 year ago. I save around 50k per month and also have a saving of around 7 lakhs from joining bonus etc. I fall under the 30% tax bracket, and my EPF contribution is around Rs.4700 monthly. I have not started investing yet, and I’m totally confused about how to start.”
“Should I just buy a Nifty Next 50 Index Fund SIP, or should I also invest in low volatility stocks? If yes, then how much amount should I allocate in each? Also, since PPF rates are going down day by day, how much money should I allocate in ELSS funds (If at all I need to invest there). I need to find a good asset allocation for the coming years, and I was hoping you being an expert, could help me in that”.
“I have heard a lot about goal-based investing in your videos, but the problem with me is I don’t have any such major financial goal. My sole purpose of investing is capital appreciation. Also, I don’t have any dependents as of now. One more concern I had was should I allocate some percentage in gold/debt also or just equity and then maybe do asset allocation a few years down the line? Can you please guide me on how to manage everything?”
It is perfectly fine to be confused before buying any investment product. Many people do the opposite. It is also perfectly fine to invest only for capital appreciation without any goal. However, if you stop to think about it, the moment you started working, financial independence became your goal. So I would recommend that you tell yourself that you are investing to be financially independent as soon as possible.
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Since you have a few lakhs saved up, you can use at least half of that as your emergency cash reserve. About one lakh in a savings bank and about two-three lakh in a liquid fund. For fund recommendations, you can refer to Handpicked List of Mutual Funds Apr-Jun 2021 (PlumbLine). You can buy yourself/your family something nice from the rest of the bonus saved up!
An asset allocation is crucial to investing, whether you have a goal or not. At 22, you can afford to hold about 60% equity and the rest in fixed income. This asset allocation does not include the emergency fund.
You can always opt for higher equity allocation, but 60% should be enough. There is no need for direct equity (stock) investing. It would only distract you from what should be your main goal now: learn new skills and build your ability to make more income.
I would recommend you choose the new tax regime. This way, you will not clutter up your portfolio in the name of an 80C tax deduction. This eliminates the need for ELSS mutual funds or PPF (since you already hold EPF).
All you need to a NIfty or Sensex index fund (see plumbline for funds) for the equity portion (60%). EPF will be the debt part (40%). An index fund eliminates the problem of worrying about active fund manager performance and fund hopping. If the EPF portfolio is initially higher, you can correct it by investing the 50K into equity over the next few months. You do not need to invest in gold separately.
This portfolio will be easy to manage. When necessary (for example, if you need to rebalance from equity to debt), you can consider including a debt fund. Always first consider the performance at the portfolio level. You can rebalance the portfolio if the asset allocation deviates by 5%. For example, if your equity allocation increase from 60% to 65%, you can shift 5% to the gilt fund. If your equity allocation drops from 60% to 55%, you can shift 5% from the gilt fund to equity.
Finally, I would recommend that you have a long-term vision of your life and aspirations. What do you wish to achieve in 5Y, 10Y, 15Y time? If you do not have an idea (perfectly normal), exposure to diverse topics and people will help. Do nothing for one hour each day – literally! It will help. I wish you all the best.
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