Important lessons to know when you start the financial life

To get some basic knowledge about how to save and how to invest money, these young guns need to have some basic understanding about these aspects

February 12, 2013 10:48 IST | India Infoline News Service
The power of compounding can be understood well if you start your investments earlier in life. However, the newcomers who have joined companies fresh out of the college will not be enthusiastic about investments. Most of them will not have any knowledge on this aspect. Of course, they will go mad when their seniors advise them to start investing right from their first month.

Rule 1: The newcomers are fully entitled to spend their salary in accomplishing their dreams. Let them buy a new bike, cool mobile stuff, laptop and go on tours. No one will be interested to start saving right from the first month onwards. It will take at least six months to start thinking about making investments.

Rule 2: To get some basic knowledge about how to save and how to invest money, these young guns need to have some basic understanding about these aspects. A simple approach is to open a fixed deposit or a recurring deposit (RD) with any of the banks. In case of RD, they are required to deposit money every month and they could see interest accumulation on their investment. It really captures their attention when they see good returns. A decent 7%-8% return by the end of the year will grab their interest. It is recommended to use this period to understand how investment works. They can look for alternate investment approaches which can give better returns.

Rule 3: There are so many books and blog articles available in the Internet which will give ample amount of information about investment principles. One need not have sound knowledge on all investment terms to get profits. Going through the information from different portals and putting efforts to correlate information will help you to be a good decision maker in the long run.

Rule 4: Do not be deceived when your friends say they got double digit returns in stock market and in mutual funds. It happens occasionally and not always. Try to understand the ground reality and accept the risks involved. Investments require a matured and professional approach to be successful.

Rule 5: Before you can start investing in equity and mutual funds, make sure you have fulfilled the financial commitments to meet the basic amenities in the family. Make sure you have your family protected with proper medical cover and life insurance cover. It is recommended to have reserve funds to meet emergency requirements.

Rule 6: Every individual would love to park the funds in a scheme that gives guaranteed returns. However, such schemes offer less returns as the risk profile is less. It is good to start with such funds in the initial period. For example, opening a PPF account is one of the best ways to start your investment. Since you are so young, you can divide your portfolio in the 25%-75% ratio. Over 25% of your investments can be in debt funds and 75% of funds can be parked in equity and mutual funds which can offer attractive returns in the long run.

The writer is a technical analyst, author and owner of the Technical Analysis Blog shabbir.in

Read more:

Good habits to manage your finances

Power of compounding… A motivating story

Understanding the importance of early investing

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