Renuka Alvares: Head of business and training development, ASK Financials

Rajiv Bajaj: Managing director, Bajaj Capital

PV subramanyam: Financial Trainer, Myiris

Naresh Pachisia: Managing director, SKP Securities

What is the ideal investment to expense ratio?

Renuka: The minimum savings ratio for youngsters should be around 15% of income. But since this is the phase where they have less obligations and more frivolous expenses, one could look at ideally saving between 30-35% so that they have a head start in building nest eggs for the future (with the power of compounding working to their advantage)

Rajiv:  Earnings, Expenses, Savings and Investments are all correlated. Today’s youngsters believe in splurging to the best. Indeed, they are the ones who have contributed a great deal to the growing consumerism in India. The ideal investment to expense ratio should be around 25%. Let us make this clearer with an example. If Raj, 29, is earning Rs. 30, 000 per month, then we would suggest that he invest at least 20-25% of his total earnings, which equals Rs.6, 000. This means that the balance amount is his expense i.e. Rs. 24, 000. Therefore, the investment to expense ratio ideally works out to 25% (Rs.6, 000 / Rs. 24, 000 = ¼ or 25%). So, the ideal investment to expense ratio should be in the range of 1/4 to 1/3.

Subra: This is really very difficult to say. That is why we call it "personal financial planning". For a youngster who is supporting a family - say a younger brother who is studying, sister's marriage etc, the short term pressures are too high to save. However for those people who do not pay rent, do not pay for food, etc, should be able to save almost their entire income. So it is difficult to put a number which is universal.

Pachisia: In my opinion, there is no ‘ideal’ investment to expense ratio for any age group. How much one is able to save and invest depends upon absolute earnings as well as the cost of living in the city where one works and lives and responsibilities beyond one’s control. What is in her control is the standard of living and lifestyle she chooses to maintain. Ideally, young investors should consciously invest greater part of their earnings to create wealth. Remember, there are two great opportunities. First, they do not have many responsibilities (as generally they are not expected to have dependents at this age, especially so because parents may still be working and children are still not around). Second, with the joint powers of time and compounding working for them, small sums of money saved now could help them build a fortune in later years. A good formula to adopt is the well-known ‘Rule of 100’. Subtract your age from 100; invest the quotient, primarily in equities as an asset class and spend the rest. If your age is, say, 25, invest Rs 75 (out of every Rs 100) and spend Rs 25.

Should equity exposure be 70-80%of portfolio?

Renuka: Most youngsters do not have many responsibilities. They also have age on their side and can take high levels of risk. A general thumb rule is 100 minus your current age is the percentage (of income) exposure that a person should look at in equities. But a youngster can look at investing for the long term and consider up to 90% allocation to equities as long as he/she doesn’t foresee any short-term requirement of funds. At the same time it is important that the person is aware of the risks involved and has the necessary appetite for risk.

Rajiv: Suitable exposure in any asset class is determined on the basis of a few important factors including age, risk taking capacity, financial goals and current exposure in different asset classes, etc. We do not recommend more than 65% exposure (of the total portfolio) in equity to our clients at any point in time. We work out suitable model portfolios for different clients and then suggest accordingly. Therefore, it is important to prudently select a mixture of various asset classes and diversify, with the help of a financial planner and hence reducing the risk associated with all these asset classes individually.

Subra: Absolutely yes. A big portion of money anyways goes into debt (own PF), so putting even 100% in equity is quite all right. However if the youngster has some short term needs like higher education, marriage, or any other goal, then that money should not be in equities.

Pachisia: Given the fact that most young investors  have a long term investment horizon, a 70-80% exposure to equities is very much desirable. Equity, as an asset class, is perhaps the finest way to create wealth over time in a rapidly growing economy like India. Quite interestingly, time dilutes the risks associated with this asset class. A comparatively high exposure to stocks may be suggested, provided the investor has the right risk appetite. The catch, however, is that she should be aware of all risks and be prepared to dig it in for long years.

Are investments with long lock-ins desirable?

Renuka: A long-term horizon in investments is always desirable for best results. Instruments with a long lock in period helps build in discipline in youngsters. They are unable to withdraw the money without an exit load based on their whims and fancies or sudden desire to splurge. The money is allowed to compound and grow over a longer period of time and doesn’t require too much of intervention by the youngster to keep checking new investment options on a short term basis provided he/she has done their due diligence on the investment.

Rajiv: The youth today can and must invest in instruments with long lock-in periods. But again, it is important that the proportion of such investments is well worked out. The youth can actually invest in investments having long lock-in periods as at this stage, they do not have many financial obligations and hence can consider keeping their money locked-in and get the maximum benefit in terms of portfolio growth. Also such close ended investments will prevent them from eating out of their portfolio. However, it is important to note that a large portion of the earnings should not be locked-in as in that case the individual may not be able to benefit by investing in other investment opportunities that may come up in due course of time.

Subra: Yes.  However if he/she has short term needs, then this question does not arise. In fact all investing should be towards a goal. If the goal is short term then it should be in debt/ balanced funds, if it is long term - buying a bigger house, retirement etc, investments should be in an equity fund.

Pachisia: Yes, the young can invest in instruments locked-in for 5 years and more. However, with so many investment opportunities around (with the flexibility of liquidity), investments in such instruments should be made quite selectively – if and only if these provide some useful diversification. Mind you, the core of the portfolio should be without lock in and the return potential should be good enough to compensate for the long lock-in.

Is it too early to buy insurance?

Renuka: -If the youngster doesn’t have dependents he doesn’t really need to consider insurance on an urgent basis. But simultaneously he needs to keep in mind that as he/she grows older the cost of premium will rise. Additionally some foreseeable responsibilities in the form of marriage or parents’ retirement should be planned for. Also there is a probability of unfortunate health conditions shaping up in their late twenties, due to high-pressure jobs and lifestyle considerations. Youngsters can consider investing in Ulips with a low entry load on a long-term basis with a basic insurance cover so that the portfolio can grow at a faster pace over the years. It is important to have a health insurance for any unforeseen hospitalization and the resultant expenses. Once they cross 25-30 they should consider taking a term plan with maximum tenure along with built in riders to protect themselves and their family members in case of any unfortunate event.

Rajiv: Insurance has evolved from being just a risk coverage tool to a risk protection cum investment tool as well. Having a risk cover in place protects the insured’s loved ones, should anything unfortunate happen to the person in question. These products are designed not only for life insurance but also cater to financial requirements across your life stages – owning home, children’s education, retirement etc. Not only this, they also provide tax advantage under section 80C as well. There are various factors to be kept in mind like the mortality charges, administrative and other charges when taking insurance. For the younger generation, mortality charges are much lower, so in a way it proves beneficial to take due insurance in one’s youth as in any case as one transgresses from one life stage to another, it becomes pertinent to have adequate risk cover in place. One can calculate this figure by getting in touch with one’s Financial Planner

Subra: Unless you are from a family where there is a risk of developing some complications later on, do not bother too much. Take some life insurance (an amount equal to what your parents spent on you till today) with your parents as beneficiaries and that should be fine.

Pachisia: Insurance is primarily meant for protecting the others (financial dependents) against the risk of the death of the earning member. To that extent, a young person with no financial dependents may avoid life insurance. However, she could look at insurance from two more dimensions. One, this is a vehicle to induce a compulsive and regular investment habit for long-term wealth creation through unit linked investment plans (Ulips). Two, cost of insurance is quite low so the youth could lock in with an insurance scheme to cover future dependents. Nevertheless, the term of insurance should be carefully selected (in a manner that the entire working life is covered). May be, a unit-linked whole life plan could be better than a pure term plan, which could mature while the insured is still working and having financial dependents. Ulips, after all, provide the best of both worlds – insurance along with investments.

Should property investments be priority?

Renuka: The sooner a person buys a house the better. The ideal age is 25 years. The benefits that a youngster can look at are: Deduction of Rs. 150000 from income, Deduction up to Rs. 1 lakh under Sec 80 C, possible appreciation in the property value, a ready house to move in when he/she starts a family. Also the progression to better homes commensurate with their improving lifestyle is easier.

Rajiv:  Real estate has been, and continues to be one of the most popular of the investment options. However, it is imperative to make sure that one invests in the right places since the most important factor that drives investments into real estate is location. Before we invest, we need to analyze the value appreciation in the different parts of the city or the commercial v/s residential real estate markets. Though not a very liquid avenue as compared to other asset classes, it yields excellent returns over a long period of time. Hence, one should consider this possibility only if they have a longer time horizon. Also, the impact of important factors like the EMIs, the rising interest rates, etc on one’s cash flow must be analysed well before taking the final call.

Subra: You should invest in a home for living purposes only if you are looking at staying in that place for at least 10 years. Currently in the Indian scenario it is much, much cheaper to rent rather than buy.

Pachisia: Unless the youth in question is not with dependents (for whom she needs to provide a home) or needs a house to enjoy a sense of security, investments in real estate should be avoided. In this era, a career person needs to be mobile and a house could actually tie her/him down to that place. Cumbersome processes of buying/selling a house and long-term loan commitments are also an issue. As a pure investment play, real estate as an “alternative” asset class should be slightly lower down in the priority list – after having taken care of the near term liquidity needs for exigencies and other important financial goals in life.