Early twenties are often filled with lifestyle changes, career beginnings and financial firsts. Your 20s may also be a suitable time to start working towards your financial goals. The earlier you start, the more time your investments get to grow. Young people also have time on their side to take calculated risks and aim for potentially higher returns as compared to people in their late 40s or those nearing retirement. Even if you do not have a large sum of money, you can start an SIP with a pocket friendly amount to invest in mutual funds in your 20s.
Here’s what you need to know about how to start investing money in your 20s.
Set Clear Financial Goals
Your investment strategy depends on your financial goals. This is why you can start by clearly defining your short-term and long-term financial goals. These include building an emergency fund, saving for higher education, travel, marriage, or building an early retirement corpus. Each one of these goals will have a different investment horizon and suitable investment vehicle. You may be able to find one or more types of mutual fund schemes to suit each one of your financial goals. When you make a long-term mutual fund investment, you aim to achieve your long-term financial goals such as retirement planning, building your dream home and so on.
Understanding Risk and Return
If there are a few fundamental rules to investing, then an important one would be the risk-reward ratio: “The higher the risk, the higher the potential return”. Most young investors may be open to invest in high-risk investments for long-term financial goals like retirement planning since they have plenty of time to cover various market cycles as compared to people nearing retirement age. A longer horizon allows young investors to ride out interim market volatility and maximise the power of potential compounding.
This means they may be able to reap higher potential returns from their high-risk investments. Taking calculated risks in your 20s when making mutual fund investments may help you create wealth for your future.
Choose the Right Investment Vehicle for Your Financial Goals
Here are a few types of investment instruments for people wondering about how to invest young:
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Mutual Fund Investments: Mutual funds, especially equity oriented mutual funds, may be a suitable choice for young investors because they offer diversification, professional management, and flexibility. As a beginner, you need not study every nuance of the stock market since mutual funds are managed by experts who invest across different asset classes like equities, debt, and gold, as per the scheme opted. Most youngsters may not have a large lump sum for making mutual fund investments, which makes starting a Systematic Investment Plan (SIP) a favourable option for them. An SIP investment will allow them to start investing in mutual funds with just Rs. 500 or more on a weekly, monthly, or quarterly basis. This minimum amount varies depending on the scheme chosen. They can setup auto-debit from their account and let their mutual fund investments potentially grow with each instalment.
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Stocks and Bonds: If you ever ask someone a question along the lines of “how to invest in your 20s,” they may not suggest that you start investing in stocks. This is because most people believe that investing in stocks requires a deep understanding of how the stock market works and how to carry out analysis to pick up the right stocks. However, you can choose sector-specific stocks based on the industry sector you are well acquainted with or simply adopt a “buy-and-hold” investment strategy of the stocks you pick basis thorough research. If you want to choose a relatively lower risk investment instrument, then bonds may be suitable. Most experts recommend balancing the portfolio with a mix of stocks and bonds to mitigate risks while optimising potential returns.
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Gold: Indians often invest in gold and consider it to be a stable investment. If you check the returns from gold, it has historically been one of the better performing investment instruments across the world. However, holding gold in the form of gold jewellery or coins may be cumbersome due to storage and purity-related challenges. The new strategy is to invest in gold bonds, gold ETFs or digital gold in other forms. This reduces the stress of buying and keeping physical gold safe. The liquidity factor is also high in this case.
Avoid Common Pitfalls
When learning about how to start investing money in your 20s, you must also understand a few pitfalls you need to avoid, such as:
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Chasing Quick Returns:While your 20s are the right time to take higher risks in pursuit of better potential returns, you should not chase quick returns. Investing requires patience and a longer investment horizon, especially in equity and equity-oriented funds, which helps you ride out short term market volatility and maximise the impact of potential compounding.
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Diversify Your Portfolio: The importance of financial planning and keeping your risk tolerance in mind cannot be overstated. Take calculated risks and diversify your portfolio with a suitable mix of instruments across different risk levels. The correct blend may be determined by your unique objectives, financial situation, and risk appetite. Take help from a financial advisor if you are confused.
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Review Your Portfolio: Adjust your portfolio as your income rises and your goals evolve. You can review it on an annual basis.
Starting to invest in your 20s is not just about making money, it is about building habits that potentially set the foundation for lifelong financial success. Even if you start small, consistency is key. Use tools like SIPs and mutual fund investments to gradually build a strong, diversified portfolio. Remember, the earlier you start, the less you need to invest to potentially reach your financial goals.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and should not be construed as advise. The above is to illustrate the concept of financial planning in your 20s. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.