Most young individuals in their 20s will be in their first job and financial planning is just not in their "to-do" list. But, there are other set of youngsters who plan their finances well in advance as they understand the power of compounding.
Before investment one has to gather all the details such as total income, debt, monthly expenditure etc., and how much one will be able to save.
Most of the young individuals confuse saving with investments. Saving is where you set aside money such as in a bank saving accounts. While investing, means to buy financial instruments which will pay you a return on some future date.
The difference between savings and investment is that savings is simply idle cash while investments help your funds to grow over a period of time.
Listing of goals a plays an important role. Make goals depending on needs and time required. Say, you wish to buy a bike next year, and holiday abroad after two years.
Any financial instrument should be invested considering various factors such as tax applicability, risk, return, tenure, etc.
Here are few investment ideas for young investors:
1) Emergency Fund
This is a fund which you set aside in bank fixed deposits or liquid funds for any emergency purpose. This fund will help you to manage finances without breaking your long-term investments.
2) Health Cover
Check with the employer about your health cover, whether the amount is sufficient, whether it covers your family members etc. Otherwise go ahead and take a health policy.
3) Equity Mutual funds
Most of the investment in this mutual funds will be towards equities. These funds should be considered for medium to long term investments to fetch better returns. They generally tend to beat returns from bank fixed deposits in the long term.
This is the best time to start investing in equities and understand how it works. One can start making investments in small amounts and increase the same. Equities are known to give better returns in long term when compared to other risky instruments.
5) Tax Saving Instruments
Tax saving instruments help you save tax and earn returns on the investments. One can consider investments in PPF, ELSS, tax saving fixed deposit depending on the return.
Systematic investment plans(SIP) are an excellent means by which you can start investing small, fixed sums of money at regular intervals. SIP uses the concept of rupee cost averaging.
You can invest systematically every month, and it works like a recurring fixed deposit. The onyl difference is that in an SIP you put money through mutual funds in equities or debt.