As a first time earner, here are your most ideal investment options

When it comes to investing, starting early is the key to building a solid financial foundation.

Even if you  have Rs.5000 per month at your disposal to invest, there are multiple options you can explore to build your portfolio. While some options come with higher risk, there are options where risk is low too. It is important that you do your due diligence before investing. There are low-risk schemes like debt funds, FD, PPF, and NSC and high-risk schemes like equity MFs. Thus, the scheme choice primarily depends on your investment horizon and risk tolerance levels.

However, one of your primary goals before you start investing, should be to beat inflation. I"n fact, equity is the only asset class that can generate inflation-beating returns," said Ravi Banagere, a mutual fund analyst at Value Research.

Let’s look at some avenues you can explore:

 

Mutual Funds 

Mutual funds or MFs are among the most popular investments that offer something for every investor. Mutual funds are managed by fund managers who pool money from multiple investors in a varied portfolio comprising bonds, stocks, and other securities. Equity funds, Debt funds, Index funds, Hybrid or Balanced Funds, and Tax-saving funds are some mutual fund types catering to different risk appetites, investment goals, and asset classes.   

"Equity mutual funds allocate at least 65% of their total assets to stocks. Because these funds invest exclusively in equities, they carry a substantial amount of risk. Additionally, these funds have the potential to generate significant returns for their investors over the long term. Consider investing in equities mutual funds if you want to achieve your financial goals through long-term investing. Mutual funds also generate better returns on short-term investments than fixed deposits or savings accounts," according to ScripBox.

"If you are a first-time investor, you can invest in MFs via Systematic Investment Plans (SIPs). While a long-term investment can potentially yield higher returns, mutual funds are subject to market risks which can affect their performance. Before investing, understand the fundamentals and types of mutual funds to choose one that aligns with your investment goals. Certain types of MFs are subject to regulations which can affect your returns," said Adhil Shetty, CEO of Bank Bazaar.

Illustration 

You begin a mutual fund investment via SIP for Rs 5000 per month for a tenure of 5 years. Assuming a 12% average historical rate of return, post accounting for costs like the expense ratio or entry/exit load), your total investment of Rs.3,00,000 would fetch you Rs.1,05,946 in gains. Thus, at the end of your investment tenure, your total investment would stand at Rs 4,05,946 lakh. 

Where to start mutual fund investment:

Aggresive hybrid funds:

"There are two specific types of mutual funds that are suitable for a beginner. #1 Aggressive hybrid funds which invest about 65 per cent in equities and 35 per cent in debt. Debt instruments include bonds that are issued by a government or a company. They earn a fixed income and don't depend on the stock market performance...An aggressive hybrid funds help in containing the equity volatility and are better-placed to provide more consistent returns as compared to pure equity funds," said Value Research's Banagera.

ELSS funds
The second option is tax-saving funds. "Also known as equity-linked savings scheme or ELSS, this type of mutual fund in India majorly invests in relatively-safer large-cap stocks. Why are these funds good for you? These funds help you save tax. Under Section 80C of the Income Tax Act, you can claim a tax deduction of up to Rs 1.5 lakh in a financial year. One caveat of this scheme is that there is a lock-in period of three years. This means that once invested, you can only take your money out after three years. However, this works as an advantage for new investors who can't handle market volatility," said Banagera.

"As far as the choice of asset class is concerned, if it is a youngster on their first job, then a 100% equity would be ideal. They can opt for an index fund or a diversified large cap scheme.  However, if the person has family responsibilities and tight on cash flow, then a hybrid fund would be more suitable," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

Fixed Deposits (FDs) 

For young professionals beginning their careers, fixed deposits or FDs may be an ideal avenue to begin saving. Classified as a low-risk investment, FDs have been consistently popular for offering assured, stable returns with modest capital appreciation. Fixed deposits essentially allow you to invest funds for a fixed tenure, ranging from 7 days to 10 years, and at a pre-set interest rate. Following the multiple rate hikes since May 2022, FD rates have been rising and are currently trending around 8%, making them a better option over the humble savings bank account.  

"Once the FD matures, you can withdraw the investment or reinvest it into another FD. However, you can choose to receive the interest payout periodically (monthly, quarterly, etc.) or once the FD matures. However, premature withdrawal is likely to be accompanied by a penalty or a reduced interest on investment. Assess your investment goal to choose a suitable tenure," said Shetty. He explains this witht he following example:

Illustration 

You decide to invest Rs.3,00,000 in an FD for 5 years at an average interest rate of 7% p.a. At the end of the 5-year tenure, with annual compounding, your principal investment of Rs.3,00,000 will earn Rs.1,20,765 as interest, taking your total investment value to Rs.4,20,765. However, note that FD returns are subject to taxation which can affect your final returns. 

Public Provident Fund (PPF) 

PPF is a government-backed, tax-saving investment which is an ideal investment designed to build savings. This long-term investment has a 15-year lock-in period and falls under the EEE (exempt- exempt- exempt) tax category wherein the principal investment, interest, and maturity amount are all tax-free under Section 80C of the Income-tax Act. Investments in the scheme can be done via monthly instalments or a yearly lump sum contribution. Annually, you can invest a minimum of Rs.500, and up to a maximum of Rs.1.5 lakh in the scheme. 

PPF currently offers an interest rate of 7.1% p.a., and this rate is revised every quarter. While PPF may not always offer inflation-beating returns, its tax-saving benefit makes it a lucrative option. Moreover, investors can extend their deposit period in 5-year blocks after the initial lock-in period is over.  

Illustration 

If you invest Rs.5,000 per month in PPF, your total principal investment over 15 years will be Rs9,00,000. At the prevailing rate of 7.1%, this investment will fetch you Rs.6,86,829 as interest, and a maturity value of Rs.15,91,829.

Illustration by BankBazaar:

What is an ideal investment for the young?

"Younger investors should be better off with a portfolio featuring more stocks with greater growth opportunities," as per the  Investor Education and Protection Fund.

Those in the 18-30 age bracket should not be having much money to invest during this period, this is where you should risk the most. Technically, you should not need the money you invest for retirement for a good 30 years. This is the perfect time horizon for an investor. 

"As such, an asset allocation with 90% to 100% in stocks would be ideal. Unless you are good at building your own stock portfolio, it is advisable to invest through mutual funds or index ETFs. Why should you select such an aggressive asset allocation? Simply because it will be the type of portfolio with the highest expected yield over time. Investing in bonds at such early age will minimize your profit expectancy for nothing," said Prithvi Haldea PRIME Database, under the aegis of Investor Education and Protection Fund.

Fund managers typically recommend 70% exposure towards equity and 30% exposure to debt for an aggressive investor. This is typically applicable for people who have a higher risk-taking capability. For the moderate investor, the quity level is brought down 60% wile for a more conservative investor, equity exposure is brought down to 50%.
 

Make sure you first create an emergency fund
When it comes to choosing the best investment options as a new earner, it's imperative that you consider your financial goals, risk tolerance, and investment horizon. One of the most crucial steps you need to take is to create an emergency fund.

Long-term growth: What's best?
"For long-term growth, an EPF scheme is an excellent option, while the PPF scheme is a viable choice for creating wealth over a 15-year period. If you're looking for tax benefits, ELSS investment, a type of mutual fund that predominantly invests in equities and has a mandatory lock-in period of three years, could be worth exploring," said Shetty.

If you have a good understanding of the stock market, you can consider investing in individual stocks, but remember that diversifying your portfolio is crucial to reducing risk, added Shetty.

Planning for your retirement early is essential, and you can start saving for it by opening an NPS account.

Moreover, it's essential to have sufficient life and health insurance coverage to safeguard your investments and protect your family in case of an emergency.

Read part 1 of this story on where to park your funds as a first time earner here.