5 Tips for Young Investor

You’re a twenty something, just out of college or a few years into working life. It’s time to start some serious investing. That’s because time is the young investor’s best friend, and you have plenty of it — perhaps two decades to save for a child’s college costs, and probably four decades to build a nest egg for retirement. I know — retirement seems eons away and thinking about it makes you feel so settled and middle-aged.

But look at it this way: If you invest a little each month starting now, you won’t have to invest as much as you would if you were to wait another 10 or 20 years to get going.

Imagine, for example, that you want to have 1 crore rupees by the time you retire in 40 years. That would be enough to provide an annual retirement income of 4,00,000 for the rest of your life.

But in fact, you’ll need 7 crore rupees, because if inflation averages 5 percent a year, that’s how much it will take to buy what 1 crore rupees buy today. 7 crores should produce an annual income of 28,00,000 rupees — equal to 4,00,000 today.

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about 1,58,000 a year to get to 7 crores in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly 4.25 lacs a year.Start early with whatever you can afford. It will make life much easier later.So what are the key things to know as you launch a long-term investing plan? Here are five tips:

Stocks, stocks, stocks

Stocks are riskier than bonds or bank savings, so in any given year you could lose money. But overall, the stock market doesn’t often lose money over periods longer than five years, because there are fewer losing years than winning ones.

Over long periods, returns in the stock market have averaged about 10 percent a year, while bonds earn a little over 7-8 percent. Cash, such as bank accounts or money market funds, averages about 4-5 percent.

Every young investor should keep in mind that investing in stocks is a long-term strategy, not something you do with next month’s rent money. If you can whether the downturns you should be pleased with the results.

But remember, when you hear that stocks have returned an average of 10 percent a year, it refers to investments that were left alone, with all dividends and other earnings reinvested. If you make 15 or 20 percent one year, leave it all in the account to continue growing. Don’t take out the “extra” earnings to spend, because they’re needed to offset the years when you make less than 10 percent.

Look at mutual funds

Though the stock market offers good returns over time, many individual stocks lose money and never recover.

You would need at least 20 or 30 different stocks to safely “diversify” your money — spread it around to cut risk. To find them you might have to read prospectuses, annual reports and news accounts on 200 or 300 stocks. Even if you know enough to do this — and most investors don’t — it’s an enormous amount of work.

Fortunately, we have mutual funds, which are investment pools run by professionals. Even if you have just a few thousand dollars to invest, with a single fund you can spread your money among dozens of stocks, sometimes hundreds. For a small fee, the fund manager does all the hard stock picking.

Focus on fees

The average stock-owning mutual fund charges investors annual fees equal to about 1 percent of assets — Rs.1 for every 100 rupees in your account. That little bit adds up. If your fund held stocks that returned 10 percent, the fee would cut your fund’s return to 9 percent. Instead of making 10 rupees for every 100 rupees invested, you’d make 9 rupees. You’d take a 10 percent pay cut.

Suppose you invested 1,000 rupees today in a fund that earned 9 percent once fees were figured in. You’d end up with about 31,000 after 40 years. Now suppose you can find a fund owning the same stocks but charging only 0.2 percent. Your 1,000 rupees will grow to about 43,000 rupees.

It’s an enormous difference. That’s why millions of investors turn to index-weighted funds that charge 0.2 percent or less. Instead of trying to find hot stocks, they simply buy and hold the stocks in a broad market index.

Many studies have shown that index funds actually beat most “managed” funds over time, because most fund managers can’t successfully pick enough winners to overcome the damage from their high fees. Index funds also tend to produce lower annual tax bills. And because their investing strategy is essentially automated, you don’t have to worry that your fund manager will quit or retire.

Minimize taxes

Since taxes chew away at returns the same way fees do, savvy investors use a variety of tax strategies.

You should open a PPF (Public Provident Fund) account as soon as you get into job even if you are investing through EPF (Employee Provident Fund). We are not suggesting young investors that they should put the maximum amount permissible. But one should open the PPF account and just put little bit so that at least the account completes its lock-in period as soon as possible.

Also one must start SIP (Systematic Investment Plan) in Diversified Equity Funds. This should be at least 10% of your monthly income.

Also, there’s no annual tax on investment profits, meaning money that otherwise would be used to pay taxes can instead keep growing as an investment.

Also one must start SIP (Systematic Investment Plan) in Diversified Equity Funds. This should be at least 10% of your monthly income.

Loans for Young People

Loans like Education Loan or Home loan are good but in case one takes loan for buying expensive Car or exotic holidays that is a wrong approach. Also use of credit card should only be to substitute handling of cash  and ease of payment and strictly it should not be used as tool to get loan.