Investment strategy for young professionals

As a young professional, you earn more money than most individuals of your age earned 10 years ago. But you also live in a world that is more competitive and uncertain.

The question is: Do you find time to plan your investments amidst your busy professional life?

In this article, we discuss how you can create an investment process that takes less time and yet helps you towards achieving your desired outcomes.

Keep it simple

If you are a typical young professional, you will not have a savings plan yet. So, first set aside 10-20 per cent of your monthly income. If you already save, then there is a strong chance that you actively trade in the stock market! We suggest that you utilise not more than 10 per cent of your monthly savings for “playing” in the stock market. The rest of your savings should be invested to meet some desired outcomes.

Your objective would be to create a portfolio that you understand and, preferably, manage yourself.

Importantly, it should be a portfolio that carries only risks that you cannot avoid such as the market risk. This is the risk that your investment will lose value because the market as a whole declines.

You should preferably avoid taking on additional risks. For equity investments, you will assume additional risk if you choose a mutual fund that strives to beat the market (called active funds) or buy stocks based on your broker’s recommendation.

Likewise, you assume additional risk if you invest in corporate bonds. Bear in mind that the additional returns that you expect to receive by investing in active funds, your broker’s recommendations or corporate bonds may not always compensate you for the additional risks that you take.

The question is: How should you set up a process to systematically channel your savings?

Systematic investment

Your investment process depends on whether you are investing from your current income or whether you are investing from your existing savings including lump-sum money from any other source. To explain, the way you invest 10 per cent of your July month’s savings will be different from the way you will invest Rs 1 lakh that you received as a gift from your grandmother.

Consider your monthly savings. You should set up a systematic investment plan (SIP), allocating your savings between stocks and bonds. Your investment in stocks should be through equity index ETFs and investment in bonds should be in PPF and recurring deposit with banks.

If you are an aggressive investor, invest up to 75 per cent of your monthly savings in equity ETFs. Otherwise, invest 63 per cent of your savings in such ETFs. The balance can be invested in PPF and bank recurring deposits.

As for investing lump-sum money, spread your investment equally over a period of not more than 6 months.

A lump-sum amount of Rs one lakh, for instance, can be invested in blocks of Rs 25,000 over 4 months. Investing over a period of time leaves you with a comforting thought that you did not invest at the highest price.

Of course such investing, called rupee cost averaging, might lower your returns compared to investing all the money at a single point in time if the market were to move up thereafter.

Conclusion

You should set up an automatic process to channel your savings into easy-to-understand investments such as ETFs, PPF and bank deposits. The investment process we discussed above will place you on the path to build your investments to help you consume for the future.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investorlearning solutions. He can be reached at enhancek@gmail.com )

COMMENT NOW