Cash them young

Youth today are richer than ever before. But they have to learn to invest. MONEY TODAY explains how to go about it.

By Kamya Jaiswal        Print Edition: February 22, 2007

Young India is in pursuit. Pursuit of dreams that are bigger than ever before. If it means living on the edge, they are only too willing. The legacy of staying on the safe side, of clinging to security first, lies ravaged. They want it all, and they want it fast. There is an astonishing clarity to their vision. The youth are not playing with abstract wishes. Consider Abhishek Bandyopadhyay, a 27-year-old software professional from Kolkata who has worked out his dream purchase to the minutest detail.

“An electric blue 1969 Mustang GTS Shelby with white fairing, bucket seats (brown leather), original tacho dials, full chrome, superchargers and tubeless tyres. The only modern touch will be a thumping digital music system with a custom Denon or Cadence speakers.” Achievable? Why, yes. Intelligent investments, disciplined savings and viola... Bandyopadhyay’s Mustang will be his. That is the thrill of living in this era; the countless opportunities. But do the young know how to exploit them? They are earning outrageously high amounts at outrageously early ages. Be it BPO workers, IIM graduates, copywriters, designers or technicians, money is rolling in. Gen Next is oozing a near arrogant confidence. This is most visible in their much talked about spending mania.

But even so much is not enough. Wants still exceed means. Inflated salaries notwithstanding, the dreams of the young are audaciously bigger than their salary slips can afford. Let’s go back to Bandyopadhyay’s dream Mustang. He is doing well for himself with a handsome pay cheque of Rs 42,000. Currently, the Shelby Mustang comes for nearly $2,00,000 (around Rs 90 lakh). If he accumulates Rs 20,000 every month, it will take him 37 years to buy it. By that time he would be 64! Surely he doesn’t intend to vroom on a muscle car at that age.





Short of robbing a bank, the only way to live these dreams is through disciplined and intelligent investment. And there is no better time to start than when you are young. Lesser responsibilities and greater capacity to take risks makes it the best time to experiment and gain huge returns. Setbacks too are best suffered at this age. More importantly, it gives an individual more time to create a big corpus and physical assets at a much lower costs.

 INVESTING EARLY MAKES YOU RICHER BY Rs 1 Cr
Corpus Rs 3.4 cr
Late start corpus Rs 2.4 cr
 Income Rs 1.2 lakh p.m.
Savings 20% or Rs 18,000 p.m.
Corpus Rs 1.18 cr
Late start corpus Rs 79 lakh
 Income Rs 10,000 p.m.
Savings 15% or Rs 1,500 p.m.
 Income Rs 25,000 p.m.
Savings 25% or Rs 6,250 p.m.
Corpus Rs 62,264
 Income Rs 45,000 p.m.
Savings 20% or Rs 9,000 p.m.
Corpus Rs 5.8 lakh
 Income Rs 80,000 p.m.
Savings 20% or Rs 16,000 p.m.
Corpus Rs 33 lakh
Late start corpus Rs 18 lakh
By the effect of compounding, Rs 1,000 invested every month from age 21 onwards in a scheme that earns 15% annually aggregates to Rs 1.98 crore by the age of 60. Ten years later at 31, even if the investor starts putting three times the amount (Rs 3,000) every month in a similar scheme, his corpus would still be smaller at Rs 1.45 crore when he turns 60. This makes a person poorer by a whopping Rs 53 lakh in a lifetime. Given that many youngsters start earning from college days, the above calculation gains significance.

However, for the youth of today, this romance of money making has no appeal. What good is money growing in bonds, funds and deposits when they can’t be accessed for splurging? “Money is meant to be spent,” agrees financial planner Surya Bhatia. “But to be able to spend throughout your life, it is important that the growth in your money keeps pace with your aspirations which only increase as you move ahead in life.”

And unlike popular perception, good investment does not mean they have to compromise on good life. The 20s is considered the prime time of living life large. No one is ready to give up satiating their adrenaline rush for a larger bank balance at 50 when probably it can’t be enjoyed like now. But it is not an either/or situation.

 Axe the tax

 With Section 80C, youth today have the opportunity to plan taxes for wealth creation. Here’s one way to go about it:

Distribution of the Rs1 lakh tax saving investment in a year:
• About Rs 20,000 would be mandatory contribution to provident fund
• At 25, about Rs 10,000 premium for 30-year life insurance policy of about Rs 30 lakh
• Balance Rs 70,000 mutual funds, preferably ELSS
• In 10 years, Rs 70, 000 will create a corpus of Rs 15.16 lakh, plus a maximum of Rs 3 lakh saved as taxes
• This can be used as down payment for a dream apartment, second honeymoon or a sabbatical from work.
• And if we have our way, may be reinvest a part of it in blue-chip stocks
What Insurance?
For a robust foundation, start with life insurance. Suggested add-ons: health insurance and personal accident cover
• Allocate not more than 10% of your gross salary to pay for insurance premiums
• Look for terms plans with longest tenure; till you are 60 years old
 How Much Cash?

 Cash and near cash is necessary for all kinds of financial contingency. Liquidity ratio (cash or near cash/monthly expenses) indicates the contingency fund that you have created and the number of months it will support you

• Ideal ratio is 3 to 4, which means that you have funds for, say 3-4 jobless months
• A figure of above 6 indicates you are risk averse to the extent of eroding your wealth.
• However, if you have aging dependents keep this much liquidity
• Anything below 2 is dangerous. You don’t have enough to feed a contingency

 

Investment Guide for the Young
Most youth do save, and some up to a fourth of their income. But what a majority of them falter at is investing— investing intelligent. MONEY TODAY presents a step-by-step primer for young investors
  What Loan?
 There are good and bad loans. Good loans are used to build assets such as a house. Bad loans don’t create assets and are used to buy home theatre, PDA, etc. Debt service ratio (monthly loan payment as percentage of monthly take-home income) indicates your repayment ability without stretching your resources
• Home loan: can invest up to 40-45% of your income
• Auto/personal loan: should not be more than 20-25% of income
• Credit card repayment: no more than10-15% of income
• Total debt servicing not more than 40-45% of pay
Retirement Planning Now?
Plans to holiday and travel after an active career needs to be well funded. Power of compounding helps you amass a huge retirement corpus; the earlier to start, the bigger it gets
• Remember that your provident fund is a debt instrument and in the longterm will not grow enough
• Contribute into pension plans that are market-linked to cushion against postretirement blues.
• Park 7-10% of income into a long-term pension scheme such as the Templeton India Pension Plan
Buying Stocks?
A high-risk and high-return investment.There are options like IPOs (initial public offer), mutual funds and direct equity Start safe with a mutual fund; you can do so with a SIP (systematic investment plan) and then look at other investing options
• Mutual fund investing is usually for the short term
• Equity investing works best for the long term
• Bonds and deposits are fixed return in nature, best avoidable for those under 30
• SIPs into any well-performing fund scheme is a good way to safe and discplined stock investing
Flashy mobiles and hot wheels can amicably coexist with scrips, insurances and mutual funds. Nor do you have to wait for a major salary hike to do it. In fact it is a good idea to get a feel of investing with small amounts. As Bhatia puts it, “Buy a fund as a first step. It will be good if the instrument bought is equity-oriented. Slowly the thrill will set in.”

But investment and saving is not for fulfilling wishes alone. They serve as a cushion for bleak days when there is no regular income. Sloshed by the heady cocktail of easy money and great job opportunities it is difficult for the young to imagine such a situation. After all, with experience their prospects only grow. But tomorrow is always difficult to predict. Even if something drastically wrong doesn’t happen, there is always a possibility of being jobless for the interval between career switches or just being thrown out of work. Remember that though the young enjoy higher employment security, job security is on the decline. Just like the young have more options today so has India Inc.

Alarmingly, financial literacy among the youth is very low (see Personal Finance Quotient). Sampath Shetty, vice-president (permanent staffing) of employment company TeamLease Services, comments, “Today the young might be earning more, but their financial knowledge is negligible.”

While many are unaware of how to manage their income for best returns, quite a number don’t even realise the importance of saving and investment. Says Kaajal Badlani, a 30-year-old entrepreneur in Ahmedabad, “My salary just keeps sitting in the savings account because I don’t know what I want to do with it.”

The first step in personal finance is indeed difficult. Keeping up with the many permutations and combinations that an ideal portfolio can have is a dizzying experience. Moreover, misconceived notions and the attraction of immediate gains such as tax benefits see the young commit financial faux pas.

Equity mutual funds present a win-win situation to the young set. Investments in equity-linked savings schemes (ELSS) are eligible for tax benefits under Section 80C. So not only does your money grows at a fast pace, but you also save tax. ELSS funds are especially good for the impatient investor who is unable to control the urge to exit and book profits everytime there is a surge in stock prices. Since they have a lock-in period of three years, the investor is unable to get out.

This also means that ELSS fund managers are able to take longterm bets without worrying about redemption pressure in the short and medium term. A caveat: don’t get taken in by short-term blips in the returns of little-known funds. Instead, invest in funds that have a stable performance record over a long period. They are more likely to churn out consistent returns.

Reviewing his stint in the markets, Ashish Ladha (27), a Mumbaibased consultant says, “My biggest investment mistake was when I invested in a stock on the basis of advice from friends. I lost all the money and realised that self-learning is essential.” Stocks aren’t the only area where blind investments can result in losses. When Kolkatabased Saptarshi Bhose, 25, invested in a pension plan a couple of years ago, not only did he lose money, it turned out to be a bad way of saving taxes following the introduction of Section 80C which had no caps for different options.

Investment in debt instruments are best decided by their tenure or lock-in period. At 21, a fixed deposit may be a good idea if the cash would be required in two years time for a GMAT or GRE exam. At 26, if marriage is around the corner, NSCs that mature in six years don’t make great investment sense.

By default or deliberation, of the entire personal finance spectrum, it is asset creation that is hottest among the youth. They crave for the sense of possession and ownership that was earlier visible in people in their 40s or so. This urgency for acquisition is perhaps what sets them on the credit pathway. From the Toshiba Tablet to an apartment in the posh suburbs of metropolitan cities, youngsters are lapping it up all on EMIs. For them, even the latest Honda Civic or Play Station is an asset because of their utility— perceived or otherwise—in the long term.

Interestingly, 45% of all borrowers in the 20-25 age group are home loan takers, higher than the 24% in the 26-30 age bracket. Experts feel that apart from parental compulsion, this may be attributed to the philosophy of getting over important expenses as early as possible when there are few other burdens such as children’s education and care of retired parents. Also, with a majority of the young moving to bigger cities for work it is only wise to convert the accommodation rent into a home loan EMI which ultimately results in asset creation.

But all money management is incomplete without tax planning. This is an added complication for the already perplexed youth. Rues Shetty: “Many youngsters don’t even know the limit under Section 80C or go ahead and invest in instruments that they think are tax deductible when they aren’t.” He blames inadequate information for this low level of awareness. HR managers of BPOs claim that the youth come to them with tax-related problems only from February onwards. It is important to remember that investments should never be made to save tax alone. Also, they are best spread out across the year.

Amidst all this money where is the fun? A dinner or movie less, a little restraint at your favourite designer boutique, not the latest iPod and little less chatting with your buddy on the mobile … that is not difficult. Given the unprecedented expansion of choices and avenues of entertainment, the temptation for youngsters to drown in the splendour of today is great. But tomorrow always comes. With the seduction of a new dream. Invest in the tomorrow and live a lifetime of dreams.

Consider Gen Next’s fascination with insurance. Almost everyone has picked up some kind of a life insurance policy. A majority of them for the wrong reason: tax saving. In most cases the cover is as low as Rs 2 lakh. It won’t be able to sustain an urban middle-class family for more than two years. Further, a youth in his early 20s is unlikely to have dependants. So, whose financial future is being covered by the insurance policy?

A flip side to this argument is that the cost of insurance decreases significantly if it is picked early. A term insurance plan of Rs 10 lakh for 30 years will cost a 25-year-old less than Rs 3,000 a year. At age 35, the annual premium for a similar cover for a 20-year plan till age 55 shoots up to around Rs 4,000. However, the need for financial security and not affordability should determine how much insurance one takes at what age.

Another idea gaining momentum among the youth is early retirement. Blame it on arduous 12-hour jobs or high-performance pressure. The young are dreaming to give up all by as early as 45-50 years. Ironically, this was the age when their parents commenced on serious asset creation. For them, planning for retirement made little sense. Pensions were calculated on the highest government salary which had semi-annual increments thanks to dearness allowance while health issues were tackled through the CGHS. But the working life of the young today has shrunk to 25-30 years in some professions. This means that effectively, they would need funds to live off for another 30- 40 years. By no means is this an easy task. But thanks to hefty initial pay packages and handsome increments the youth can certainly afford to do so if they plan well and early. For instance, to create a corpus of Rs 2 crore by the age of 55, one needs to invest from the age of 22 only Rs 5,838 a month in a retirement plan that earns 10% annually. However, this amount increases to a walloping Rs 16,825 if invested from age 31 onwards. Many youngsters today also nurture the dream of starting their own enterprise. The environment in the country now is certainly more conducive for startups than it was ever before. But translating innovative business ideas into reality needs heavy funding. It is essential that aspiring entrepreneurs plan how much their initial costs (before venture capitalists put in their money) would be and start investing accordingly. Also, there must be a contingency fund for unforeseen expenditure and possible losses that the venture may incur during its gestation period. An early start in allocating money and routing returns of investments to create the corpus the youth are likely to require will allow them a longer time to frame and modify their plans.






There is no wizardry that can formulate the ideal mix of equity, debt and insurance. These components are largely customised depending on family status, responsibilities, work profile and flair to handle the giddy stock markets. Broad disparities notwithstanding, most financial experts unanimously agree that no matter what the income category, 18-30 year olds should have an equity-heavy portfolio. But even here the youth seem to slip. According to Technopak’s survey— India Consumer Trends 2006- 7—when it comes to finance, Indian youth is still risk averse. Equity constitutes less than 1% of the total investment made by them. This cautious approach goes against their daredevil image.

Across all asset classes, equity has given the most handsome and consistent returns in the long term. This only makes it a more viable option for the youth. The initial working years (20-25 years) when monthly outflow of money is the least is the time to go for the kill. An equity-debt ratio of 70:30 greatly enhances chances of impressive wealth creation. As other family commitments set in by the late 20s, the ratio can be slightly tweaked to a more stable 60:40. For the uninitiated, equity diversified mutual funds and index funds needn’t be tracked as much as stocks and are the safest way to explore the stock markets. As they develop a feel of the market movements and research about past performance of companies and fund managers, they can invest larger amounts.

Equity mutual funds present a win-win situation to the young set. Investments in equity-linked savings schemes (ELSS) are eligible for tax benefits under Section 80C. So not only does your money grows at a fast pace, but you also save tax. ELSS funds are especially good for the impatient investor who is unable to control the urge to exit and book profits everytime there is a surge in stock prices. Since they have a lock-in period of three years, the investor is unable to get out. This also means that ELSS fund managers are able to take longterm bets without worrying about redemption pressure in the short and medium term. A caveat: don’t get taken in by short-term blips in the returns of little-known funds. Instead, invest in funds that have a stable performance record over a long period. They are more likely to churn out consistent returns.

Reviewing his stint in the markets, Ashish Ladha (27), a Mumbaibased consultant says, “My biggest investment mistake was when I invested in a stock on the basis of advice from friends. I lost all the money and realised that self-learning is essential.” Stocks aren’t the only area where blind investments can result in losses. When Kolkatabased Saptarshi Bhose, 25, invested in a pension plan a couple of years ago, not only did he lose money, it turned out to be a bad way of saving taxes following the introduction of Section 80C which had no caps for different options.

Investment in debt instruments are best decided by their tenure or lock-in period. At 21, a fixed deposit may be a good idea if the cash would be required in two years time for a GMAT or GRE exam. At 26, if marriage is around the corner, NSCs that mature in six years don’t make great investment sense.

By default or deliberation, of the entire personal finance spectrum, it is asset creation that is hottest among the youth. They crave for the sense of possession and ownership that was earlier visible in people in their 40s or so. This urgency for acquisition is perhaps what sets them on the credit pathway. From the Toshiba Tablet to an apartment in the posh suburbs of metropolitan cities, youngsters are lapping it up all on EMIs. For them, even the latest Honda Civic or Play Station is an asset because of their utility— perceived or otherwise—in the long term.

Interestingly, 45% of all borrowers in the 20-25 age group are home loan takers, higher than the 24% in the 26-30 age bracket. Experts feel that apart from parental compulsion, this may be attributed to the philosophy of getting over important expenses as early as possible when there are few other burdens such as children’s education and care of retired parents. Also, with a majority of the young moving to bigger cities for work it is only wise to convert the accommodation rent into a home loan EMI which ultimately results in asset creation.

But all money management is incomplete without tax planning. This is an added complication for the already perplexed youth. Rues Shetty: “Many youngsters don’t even know the limit under Section 80C or go ahead and invest in instruments that they think are tax deductible when they aren’t.” He blames inadequate information for this low level of awareness. HR managers of BPOs claim that the youth come to them with tax-related problems only from February onwards. It is important to remember that investments should never be made to save tax alone. Also, they are best spread out across the year.

Amidst all this money where is the fun? A dinner or movie less, a little restraint at your favourite designer boutique, not the latest iPod and little less chatting with your buddy on the mobile … that is not difficult. Given the unprecedented expansion of choices and avenues of entertainment, the temptation for youngsters to drown in the splendour of today is great. But tomorrow always comes. With the seduction of a new dream. Invest in the tomorrow and live a lifetime of dreams.










 

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close