Happy 18th birthday; It’s time to start financial planning

By Vikas Mathur

Turning 18 comes with many privileges. You can vote, apply for a PAN, driver’s license, credit/debit card, and make all types of life decisions independently. However, one thing that is often missing from the “first to do list” of young adults is the concept of financial planning. Yes, the freedom to manage bank accounts and investments should be celebrated the most. Know that the earlier you start investing in equity-related products, the better you can profit from the long-term markets.

For example, Rs 3,000 invested monthly in mutual fund SIPs for 30 years can yield Rs. 1.05 crore at an expected rate of return of 12% per annum. will be Rs 56.37 after 25 years. So, to get the most out of the power of compounding, you should start investing in mutual funds as early as possible. However, returns from market-linked instruments will always be subject to market risk and a return of 12% is considered the basis for past performance of share plans.

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Where to start?

As a young investor, you always have to think about long-term returns. Young age brings the best combination for the markets, ie a high risk appetite and a long-term horizon. You can take your time to learn about the dynamics of low-cap equity markets and identify your unique investment profile. Until you complete your formal education in 5-6 years and have a regular source of income, you’ll be ready to invest more, with more confidence and clarity about your goals. For starters, when you have a low financial education, make capital protection your priority. Avoid speculative activities. Understand that investing in financial markets is the only part of the investment basket. At 18, it is recommended to begin exposure to the equity markets through mutual funds and blue chip stocks with a minimum horizon of 3 years. Review and rebalance your portfolio annually. Take your time and test the waters before jumping into intraday trading.

Choose investment instruments

At this age, when looking for affordable and less risky investment options, it is best to opt for a combination of mutual fund SIPs, small wealth baskets and blue chip stock SIPs for a stable return in 3 to 5 years. These instruments have the potential to produce maximum return by accumulating returns despite market fluctuations and growing your corpus at a steady rate over the long term. Reduce risk when goals are close and review your portfolio annually and rebalance it by replacing poorly performing funds with higher yielding ones. While for guaranteed returns, recurring bank deposits (RD) are the best bets for small investors.

Portfolio diversification

Portfolio diversification is a recommended strategy to reduce portfolio risk while investing in market-related investment instruments. The ratio of equity and debt in your portfolio varies widely depending on risk appetite, time horizon and financial goals. For example, over the long term, you can take an aggressive approach and build a large stock portfolio that has high risk and high return potential. Whereas for the short term, i.e. a period up to 1 year, you should choose a combination of DR and balanced funds to diversify the portfolio and reduce investment risk. Remember that there is no single portfolio strategy. Base your risk appetite and goals, build your portfolio. Don’t make your portfolio sector-biased, always diversify. Use professional advice and make informed decisions.

Crypto is a buzz, so what?

Investment decisions should not be based on whims and assumptions. As we have seen a lot of turmoil across the globe in cryptocurrencies, it is recommended to wait for the RBI and Indian government to introduce regulations and standards before considering Cryptos as part of your investment portfolio . At 18, just as voting is your basic right, starting to work for a financially secure future is right.

(Vikas Mathur is Head of Strategic Partnerships at Religare Broking Limited. The views expressed are those of the author and do not reflect the official position or policy of FinancialExpress.com.)

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