Financial planning for the youth of India


Make sure you start your life after studies on the right financial foot by treating your financial future seriously while you’re still in college, Madhu Sinha explains

The Indian youth never had it so good. On the consumption side, the choice of goods & services available is unprecedented. And as far as income is concerned, given the blooming economy & its ever improving prospects, opportunities have ever been better! So, the youth is earning a lot & spending a lot! It’s definitely a happy situation to be in!

As a college student, you should be focusing on your financial future as well as your studies. No, not the financial future consisting of next week’s pizza fund, but your long-term personal financial future. Make sure you start your life after studies on the right financial foot by treating your financial future seriously while you’re still in college.

Young investors have an edge over others on account of their age. In other words, a young investor has more time on hand as compared to middle-aged investor or one who is nearing retirement. Young investor can take higher risk compared to middle aged investor or nearing retirement investor. This in turn affords young investors greater flexibility while making investment decisions.

If we take simple example, most of the young spend Rs. 500 per month very easily on food, entertainment, etc, how much money they are losing in future, is illustrated with the help of power of compounding method.

Power of compounding

Years

12% return p.a.

15% return p.a.

0-5

Rs. 40,835

Rs. 44,287

6-10

Rs. 1,15,019

Rs. 1,37,609

11-15

Rs. 2,49,790

Rs. 3,34,253

16-20

Rs. 4,94,628

Rs. 7,48,620

21-25

Rs. 9,39,423

Rs. 16,21,765

26-30

Rs. 17,47,482

Rs. 34,61,640

(Assume the individual invests Rs. 500 per month.)        

   

The percentage of younger generation in India is more compared to old. Over the past couple of years Indian economy has seen unprecedented economic boom leaving more surplus money in the hands of people. The young can use financial planning route to meet their future financial goals. They have their whole lives ahead of them, and ample time to plan for every goal including retirement. The problem with the masses is that they do not plan for their finances. Some who have a decent salary packages and decent amount of surplus available also invest without doing proper asset allocation in various asset classes like equity, debt, real estate, gold, etc.

There are various investment avenues available to young investors and the various facets of each avenue like small saving schemes, equity, mutual funds, ELSS, unit linked insurance plan, etc. Today youth should ensure that he is associated with the right investment advisor at all times. He could well be the individual who plugs the gap between youth achieving or not achieving his financial goals and objectives. Financial markets have become very complex and there are varieties of products available to choose from. The choice of product will depend upon:

  • Age of the client
  • Time horizon of investments
  • Risk appetite of investor
  • Need of the investor

As a rule of thumb, a person shall invest % of his portfolio in debt equal to his age and the remaining amount in equity after providing for sufficient amount in the form of liquid assets / cash for emergency provision. A person shall also plan for the purchase of residential house. A young person has a high risk appetite and the time horizon of investments is also long, he should invest more money in equity and equity related instruments and fewer amounts in debt. When a person starts working, his income level is also low and there is very less surplus available for investments after meeting his monthly expenses. Every young person would like to become rich very fast.

The small amount of saving per month if done in a disciplined manner and systematically will lead to a higher amount of wealth accumulation over a longer period of time. If a young person of age 23 starts saving Rs. 2,000 per month till he is age 60, he will be able to accumulate Rs. 3,96,06,204, if rate of return on investments is 15% p.a. In this case I have not taken into consideration the increase in salary and thus increase in amount of investments.

The young investors have to first do their asset allocation. After deciding about asset allocation, the choice of products will start.

The writer is a certified financial planner and an associate dean at International College of Financial Planning.

Read more:

Good habits to manage your finances

Power of compounding… A motivating story



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