Investment fundas for your 20s

If you’ve only just landed your first job, and you think you’re earning peanuts, here’s a thought: You’re perfectly placed to rack up a sizeable body of savings. Surprised?

In your 20s, maybe you have an education-loan EMI or a two-wheeler loan EMI and rent. . But you’re unlikely to have major home-loan EMIs, healthcare bills, or family’s/children’s expenses to think of. So even though it may not feel like it, your disposable income is high. Setting aside a small sum towards monthly savings (possibly in an equity-linked SIP) should be a breeze.

It’s also a good time to save towards your emergency fund. This could be in the form of liquid funds and your goal should be to have at-least 3 to 6 months’ salaries set aside. As you age, ensure that this amount grows in proportion to your rising income. This rainy-day fund is meant to buffer you from any unexpected pink slips at work, unforeseen health crises or an accident that could halt your earning temporarily.

Debt funds are a great option to invest your reserve money in. They are very easy to withdraw from - within a few hours, to a few days – and they can also be earning instruments. They invest in money-market instruments like treasury bills, corporate papers and bank Certificates of Deposit. Most of these instruments have a fixed interest rate and have very low to low risk as compared to many other investment products and a short maturity window. Ideally, you should invest towards your emergency fund first, before plunging into investing for your other goals.

Each investment option also gives you a degree of tax benefits, which are an added sweetener in your savings journey. Another important reason why money invested earlier earns more, is that most instruments use compound interest to reward investors (i.e. interest gets calculated on the principal, and the accumulated interest of previous periods) So the earlier you invest, the longer and more you will gain from the power of compounding.

Consider this simplified example involving mutual funds:

• Vishal and Edwin are 2 friends who start working at the age of 25.
• Vishal immediately starts a Systematic Investment Plan (SIP) at Rs. 2000 a month that yields him 12% annual interest. So, he annually invests Rs. 24000 in his chosen fund, calculated using the SIP calculator.
• Edwin, on the other hand, starts investing Rs. 2500 monthly, after 10 years i.e. at the age of 35, in a similar fund, yielding annual interest @ 12%.
• Edwin’s annual outlay is Rs. 30,000/- (i.e. Rs. 6000 more than what Vishal invests)

By the time they are 45, through the multiplying effect of compounding interest, Vishal will have earned over 15 lakhs more than Edwin. Even though Vishal spends Rs. 6000 less annually, this is possible because of his 10-year head-start in investing. Mind you, mutual funds are market-linked, and our example has not even considered the market’s effect upon earnings. In real life, Vishal’s earnings at age 45 would likely be much more than the straightforward compound interest projection we have assumed.

Our example uses amounts as low as Rs. 2000 and Rs. 3000. That’s about as much as you’d spend on a night out, let alone your monthly entertainment. An SIP can be availed for as low as Rs. 500 monthly too. It may not seem like much now – but when you’re better off by many lakhs of rupees in your 40s, for an inexpensive decision taken now, you will thank yourself mightily.

So, invest in a mutual fund today and build a portfolio for a worry-free life. Like they say, well begun, is half done.

Disclaimer: This article has been authored by Dialogbox, a Mumbai based Content Design firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & Dialogbox shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.