I have just started working. I don’t really save much. But I live with my parents and the only “payment” they want from me is for me to start investing. But I don’t have much to invest. So where do I begin?
Let me start by assuring you why you are in a great place.
You don’t seem to have any debt. No dependents. No monthly household expenses. That itself puts you in a really sweet spot. To add to it, you have time. Lots of it. You need to capitalize on this. It is hard to overstate how valuable time is when it comes to investing. Your biggest asset right now is time, not the amount of money you can invest. So utilize this to the hilt.
First, let's look at the amount you save.
You started off by saying that you "don’t really save much". Which leads to "I don't have much to invest".
I have a suggestion. Can you keep track of your money for just a few months? This will give you a clear indication as to where it goes. By examining your cash outflows, you can identify patterns in your spending and zero in on your problem spots.
Why am I asking you to do this? Because there is a fair chance that it is not an inability to save, but the inability to track your spending. And you can, by making note of where your money goes.
Now I do understand that writing down every transaction may be overwhelming, not to mention tedious. So let’s make it easier. At the end of every day, fill in the amount spent in three broad categories: Travel, Food, Other. This is much more doable. Just try it out for three months at least.
Being aware is the first step. Once you see where the money is going, you can tweak your spending accordingly. For example, if you find that 45% of your spending is on eating out or meeting friends in coffee shops, you can cut it down slightly by limiting such events to just (maybe) twice a week.
Now, let me convince you with some numbers.
Let’s say you earn a return of 10% per annum over 23 years.
- Invest ₹10,000 per month, you will accumulate approximately ₹1 cr
- Invest ₹15,000 per month, you will accumulate little over ₹1.5 cr
- Invest ₹20,000 per month, you will accumulate around ₹2 cr
If you cannot afford ₹20,000, start with 15k. If you cannot afford that, go with 10k. If not, even a smaller amount will do. But start. Now! The following year can increase it slightly. The year after, increase it again. The point is, doesn't matter how small the amount. Just ensure that you start, and once you do, keep increasing the amount invested.
Aim for investing a minimum 25% of your take-home salary. Use it as a benchmark that you hope to achieve.
I think Warren Buffett’s words are apt here: “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
- Start small.
- Be consistent.
- Increase the amount every year.
So where do you start?
I suggest you start with an equity mutual fund. You can start with a large-cap fund that lays the foundation for a solid portfolio. If you would like to take a little more risk to get a better return, you can consider a large-and-mid-cap fund.
The word ‘cap’ refers to market capitalisation. Market capitalisation is calculated by multiplying the number of shares issued by the company with the market price per share. For example, a company with 20 million shares selling at Rs 50/share would have a market cap of Rs 1 billion. Market cap allows investors to understand the relative size of one company versus another. Large-cap companies are presumed to be financially solid and are relatively safer when compared to smaller companies. Such stocks are not as volatile as mid and small cap stocks. They do not collapse as dramatically during a bear market.
A large-cap mutual fund is an equity fund; one that invests a minimum 80% of its corpus in large-cap stocks. Such funds scout the universe of stocks that form the top 100 companies (by way of market cap) listed on the stock exchange. A large-and-mid-cap fund invests at least 35% in large caps and a minimum of 35% in mid caps.
I asked the director of fund research, Kaustubh Belapurkar, to suggest some funds. Here are his recommendations.
Investment via a Systematic Investment Plan, or SIP. So every month, on a predetermined date, a fixed amount is debited from your bank account to buy units of the fund of your choice. It is convenient and consistent.
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