Novice investors, generally young and in the early stages of their professional lives, have a significant advantage with a long-term investment horizon. Over time, these investors should try to maximize their investment opportunities. This article outlines the major investment strategies and options for beginners in India.
Why should you start investing early?
Starting investing at an early age can help you reap the benefits of long-term investing. With age being on your side, adopting an aggressive investment approach can yield substantial returns. Even if the initial investment faces setbacks, there is still enough time left to recover and achieve profitable results. Initial investment is important to take advantage of potential opportunities.
mutual funds
With a long-term perspective, mutual funds can harness the power of compounding. They do not require any extensive market knowledge as they are managed by professional fund managers with proven track records. Young investors are advised to consider equity funds, which are known to deliver excellent long-term returns. While hybrid and debt funds are also viable, they generally offer lower returns.
For tax-saving purposes, Equity-Linked Savings Scheme (ELSS) is an excellent option. Covered under Section 80C of the Income Tax Act, 1961, ELSS allows wealth accumulation as well as tax savings of up to Rs 46,800 annually.
Stock Market – Direct Equity
Stock market investing offers the highest potential returns among all investment options. With a long-term horizon, young investors can deal with market volatility and reap substantial profits. However, investing in the stock market requires market knowledge. Without this, investing in the stock market can be as risky as gambling. For example, an investment of Rs 55,000 in Eicher Motors shares in 2001 could now be worth Rs 4.75 crore, indicating the market potential.
Bank deposit
Bank deposits cater to people reluctant to take risks, offering low-risk investments as well as low returns. Fixed deposits are suitable for those who have a lump sum amount, which offers attractive interest rates over a long period. Recurring deposits are also an option for regular investments. However, the returns from bank deposits are generally lower than those from mutual funds and stock markets.
government schemes
Many government schemes provide safe investment opportunities. Public Provident Fund (PPF), with a lock-in period of 15 years, offers returns between 7-9% per annum. Other options include National Savings Certificate (NSC) and Voluntary Provident Fund (VPF).
Unit Linked Insurance Plan (ULIP)
ULIPs combine insurance coverage with long-term wealth creation, suitable for investors with medium to high risk tolerance. Investments in ULIPs are divided into life insurance premiums and capital investments in debt and equity funds.
The key to financial success is to start investing at an early age. This approach allows for significant wealth accumulation over time, providing a strong financial foundation for achieving various goals. By exploring these investment options, novice investors in India can make informed decisions and maximize their financial growth potential.
What do analysts say?
Mohit Gang, CEO, Moneyfront, said, “For anyone who is starting their investment journey, it is important to think about the long term and keep things simple. Complexity is the mother of all problems in a portfolio. One should not try to get into complex products or take risks with fancy sectors or bet on unknown stocks. Many times, youngsters get lured into easy and quick money trading ideas, which can result in massive losses if not followed with proper risk framework. Or it is not done with proper guidance/experience. A bad experience at a young age can deter someone from investing and derail the process of financial independence.”
“The best option for a beginner is to start with a systematic investment plan which is gradual and regular investments in a disciplined manner. The best option to select can be in a Nifty index fund or a good quality flexi cap fund. These mainly have large cap allocations and are relatively safe within the equity class. Also these can become long lasting and permanent allocations in the portfolio. After gaining enough experience and confidence, one can look into multicap, mid cap or Should proceed with further allocation to the small cap category.”
Dr Poonam Tandon, Chief Investment Officer, IndiaFirst Life, said, “Aim to save a part of your income for investment.
Investments can be more in equities as a long term savings product which gives them higher returns on compounding basis and with tax efficient returns. “Youngsters who are not investment savvy should, as a rule, outsource it so that experts can provide them with better risk adjusted returns and help their hard-earned money grow at a steady pace while beating inflation.”
“Investment should also be made in PPF which is a very tax efficient product and helps in creating a long term corpus which has no credit risk and has EEE – which is tax free at the time of investment, interest is tax free and the amount on maturity is also tax free. Youngsters have many investment products in the form of ULIPs, mutual funds, new pension schemes and combinations of all these for investment purposes. This also helps in diversification of risk. One can use different time frames for investment. In different products as per your needs – Mutual fund investments can be used for short term goals and ULIP and NPS can be used for long term.”
“There are products like Sovereign Gold Bond (SGB) which are issued by the RBI and can be used as a proxy to buy physical gold. Young people should also take care of the fact that they are covered for term life insurance and health insurance. Currently we are also getting whole life insurance till the age of 99 which is a good way to insure yourself if the premium is low, and the person is in good health. In later years, it can be The lump sum amount can be used by the heirs in the unfortunate event of death.”
Guaranteed return schemes are run by insurance companies, which can be used to invest in case of individuals who have low risk appetite or sometimes if one wants to lock in higher interest rates for a longer period. Deferred annuities are also used for the same purpose, especially if one does not have the lump sum amount at once, but can be used to lock in assured interest rates for a longer period,” she said.
Raj Khosla, Founder and MD, MyMoneyMantra.com said, “Investing has always been a process that keeps evolving as we are exposed to different assets, strategies and investment styles. The journey to wealth maximization and huge returns often involves patience and a little-to-moderate knowledge about various investment instruments.”
“The youth should be patient because overnight fame is nothing but a fantasy when it comes to investing and making money while staying within legal limits,” he said.
“Knowing yourself financially is quite important as it will help you avoid high-risk bets and some difficult investment choices that can expose you to extreme volatility and market risk.”
“It’s important to move from simple to complex when you’re new to the world of investing. Investing with borrowed money is a big no-no. Most of us understand this, but when a lucrative money making opportunity comes along we try to capitalize on it.”
“With the ever-evolving market and market practices, learning new things, understanding technological advancements, settlement cycles, tax components associated with different assets, entry/exit timelines, etc. is a top priority. The market, nowadays and historically, remains abundant with noise including investment tips, get rich quick ideas, where to invest, when to invest etc. Beginners can start slow.”
He further adds, “If you are a little bit doubtful or short of funds then you can go the micro investment route. Staying away from holiday loans, payday loans, credit card loans and all other high cost loans can help you a lot.”