A beginner’s guide to investing: All you need to know to get started

Saving is defined as the difference between your salary and your regular expenses. Once you have spent on your short-term needs and bills, get down to detailed financial planning to target mid and long-term goals. The first step should be to compute your savings rate using an income and expenditure statement. Ideally, the savings rate should be at least 30% of your pay. Analyse the reasons if it is less. It could be your starting salary is low or your expenses are very high. Should you be worried if you are saving more than 30% of your salary? Certainly not.

The next step entails making a holistic financial plan. List all your financial goals and the time you give yourself to attain it. Experts ask you to target mid-sized goals— where the outlay is less than Rs 1 lakh— first. Planning for mid-sized goals in the initial years of your career will also have a positive impact, demonstrating the power of financial planning.

This is probably the piece of advice you have heard the most, and rightly so. We find ourselves amidst a global crisis, so creating a contingency corpus, one that ideally covers at least six months’ expenses, is the need of the hour. This buffer amount will help those with education loans to avoid default in case of job loss. Since it is difficult for first-time earners to postpone small and mid-sized dreams till a contingency fund is created, they can strive to achieve both simultaneously.

Financial planning calculations, especially for the big-ticket goals such as buying a house, making provision for marriage expenses etc. are based on expected future salaries. Young people tend to make the mistake of assuming very high future salaries by extrapolating the huge initial salary or high increment they get at the onset of their career. It is a grave mistake to assume that high increment rates will continue till retirement and make financial plans based on them. Covid-19 pandemic has shown us the worst-case scenario, I.e. of a salary cut instead of a hike.

Further, a low starting salary should not dissuade you. Don't be disheartened, instead, be patient and upskill to get a better job. Invest in yourself by building a greater range of skillsets.

Ideally, you should pay off your debts before planning for goals. The most likely debt at this stage will be the education loan. Since interest paid on education loans are allowed as deduction under Section 80E, the effective interest cost will be lower and therefore, assess if you should prepay it. Default rates tend to be higher for education loans, thus, banks often charge higher interest rates. Your decision to prepay or not should be based on the effective costs of these loans after adjusting tax benefits.

What about those who want to study further abroad, after having worked for a year or two? In this case, it would be wise to avoid very long term products like NPS and PPF. These are suitable only if you plan to return to India after post graduation. While NRIs are allowed to continue with their investments in NPS, they can’t invest fresh money in PPF. However, you can keep the existing investments in PPF and keep on earning tax free interest on them.

Once you know what your goals are, figure out asset allocation— how much you wish to pour into each asset class. This decision depends on several factors, start with the time period to reach goals. Since most of the investment by new earners is usually for short-term goals, it should be parked in short-term debt funds.

Age is the next important factor and experts usually suggest the thumb rule of ‘100 minus age’ for equity allocation. However, experts also tweak this rule for first-time earners because most youngsters are new to stock market volatility and equities. In other words, go with the 100 minus age rule only if you are already familiar with equities. First-timers should start with around 40-50% in equity and increase the equity allocation basis the 100 minus age rule after experiencing the equity market for a couple of years.

Even this moderate equity allocation should be carried out at a low pace. A similarly slow approach is needed when you decide to shift from equity mutual funds to direct stocks. If you wish to invest in the stock of a company later on, you must be well-versed with the company's operations, model, valuation, basically its overall financial standing. Keep yourself restricted to Nifty stocks and invest in high risk mid-cap stocks only if you are able to withstand the volatility.

Once you decide the asset allocation, the next step is selecting the equity and debt products to invest in. You may consult your parents but remember that most parents invested in traditional and inefficient products like bank FDs, chit funds, endowment insurance plans, etc. and might suggest the same to you, which may not suit your needs. However, PPF is one product you can continue, it enjoys the 80C benefit and also offers 7.1% tax free interest, point out experts.

The Voluntary Provident Fund (VPF), the additional investment you make to your EPF, is a good option too for long-term goals. It offers 80C benefits and 8.5% tax-free interest. However, the government has made the interest taxable if your annual contribution is beyond Rs 2.5 lakh. Still confused? Do consider taking the services of a professional adviser or financial planner to tell you about the best products.

Tax planning is a must. Look for investment options that provide tax benefits. For example, you can invest in a normal equity fund or tax saving equity funds. While the return and risk profiles of ELSS funds will be similar to that of a flexi-cap fund, you get additional benefits under Section 80C. However, these come with a three-year lock-in. Do not consider investing in equity funds if your holding period is less than three years. Among debt options, you can consider PPF, VPF or other fixed income options like bank FDs with 80C benefit, post office schemes like NSC etc. Unlike PPF or NSC, NPS schemes are managed by several fund managers so their returns will differ.