In this interview with Sumaira Abidi on CNBC’s MF Corner, Tarun Birani talks about the thought-provoking topic of saving and investing for students & young adults.
The characteristics of Gen-Z are quite distinctive compared to other generations. While they are surely a tech-savvy bunch, they are an extremely hard-working and career-focused lot. These young adults today are cognizant of the importance of making the right investments. There is nothing like having your own portfolio of investments to help you feel more financially secure. In fact, having a strong investment portfolio could free young adults up from having to take on a mundane job and allows them to follow their true passion in life.
However, to truly maximize the benefits of investing, one must understand the different investment avenues. It’s also critical to analyze one’s own financial goals, behavior, and investment temperament to get the most out of investing.
The Benefits of Starting Early
You get to benefit from the magic of compounding! Compounding refers to interest earned on interest and tends to work like magic for your investments because reinvesting your earnings on a consistent basis will keep increasing your wealth exponentially over time.
If you are a student, now is an excellent time to begin experimenting with investing and building a robust Financial Plan. Warren Buffet started investing at the tender age of 11 and developed the habit of investing. But apparently, he regrets on not starting still earlier. The advantage of beginning early is that you have more time to learn from your mistakes and work on developing an Investor Mindset.
Suitable Investment Avenues
Beginning early will give you first-hand experience of the risks and returns entailed by choosing between different investment avenues. For example, investing in equity involves greater risk than debt, which is more safety-oriented. For long-term growth and to gain the most out of compounding, it is necessary to invest in equity.
It would be advisable to begin your investment journey by putting some of your money in equity and some in debt. You will better understand how each of these investment avenues works and delivers returns.
Guidelines to Kickstart Investing
It would be best to begin by investing in a well-diversified mutual fund. This will even introduce you to the tax efficiency part of investing and will be a good learning experience. For example, if you start investing at 15, you will be more confident about making investment decisions when you receive your first salary cheque at the age of 22.
Note: It’s important to note that your income as a minor gets clubbed with one of your parents’ incomes. That would be with the parent who is earning a higher income.
Investing your first salary
As mentioned above, getting started early with investing puts you in a better position to make investment decisions when you begin earning. It also helps you understand your risk appetite and your temperament towards investment. You can use this information to determine your long-term financial strategy. This information will play a useful role in deciding how you would like to split your investment between equity (high risk) and debt or fixed-returns (low risk) investment products.
It’s a must to set up goals and objectives that you would like to achieve with your investment activities. This gives it more purpose, and it will keep you interested in tracking its performance vis-a-vis preset objectives. Goals can be divided as per their time frames: short, medium, and long-term goals. It may not be easy to set a long-term goal as a student or a young adult. However, you could set not-so-distant goals. These goals could be as diverse as saving for your future education or purchasing the latest upcoming iPhone model.
Beginning to invest early will also introduce you to the importance of diversifying your asset allocation to counteract the effect of uncertain market conditions. This is a time-tested method of wealth creation, and it’s best to test it when you’re a student. It will enable you to make astute investment choices when you begin earning.