How To Invest in Your 20s? Tips & Investment Options

Stepping into your 20s, earning money, and paying your bills! It’s an exciting moment for every 20-year-old. It means you’re starting to make real-life decisions about using your money wisely, including investing it.

So the question arises: Should you start investing in your 20s?

The answer is simple – Yes, and right away! Starting your investment journey in your 20s gives you a crucial advantage: time. If you begin investing early, you have more time for your money to grow, making it easier to achieve your financial goals.

But for new investors, the world of investments can seem overwhelming. There are so many options and strategies to choose from, making the decision-making process quite challenging.

In this article, we will discuss why you should invest in your 20s, valuable tips to get started, and various investment options.

Why Should You Invest in Your 20s?

Investing in your 20s brings a lot of benefits, from long-term wealth accumulation to financial security. Let’s delve into some of the compelling reasons to start early:

1. Time is Your Best Friend: The power of compounding is a magical force that can multiply your wealth over time. When you invest in your 20s, your money has decades to grow, making it much more impactful. For instance, if you start with a modest sum and consistently invest over the years, you can amass a significant corpus.

Example: Consider two friends, Ramesh and Suresh. Ramesh starts investing at 25, puts aside ₹5,000 per month until he’s 35. He then stops the SIP and invests the accumulated funds for the next 25 years, i.e., until he turns 60.

On the other hand, Suresh starts at 35 and invests ₹5,000 every month until he’s 60. Suppose the average return on investment in all cases is 12% p.a.

Due to the power of compounding, Ramesh will likely have a larger corpus by the age of 60, even though he invested for a shorter duration.

2. Risk Tolerance: In your 20s, you can afford to take more risks with your investments since you have a longer investment horizon. High-risk investments like stocks or equity mutual funds can potentially offer higher returns. You have the time to ride out market volatility, which reduces the impact of short-term market fluctuations.

Also Read More About What is Equity Mutual Fund?

3. Financial Independence: Investing early can expedite your journey towards financial independence. You can accumulate enough wealth to meet your long-term financial goals, whether it’s buying a house, starting a business, or travelling the world. Moreover, it reduces the financial strain of loans and credit card debts.
4. Emergency Fund: Life is unpredictable, and having a financial safety net is crucial. Investing in your 20s allows you to build a robust emergency fund to cover unexpected expenses such as medical bills, vehicle repairs, or job loss. This financial cushion provides peace of mind and reduces the need to rely on high-interest loans or credit cards in times of crisis.
5. Beating Inflation: Inflation is the gradual increase in the prices of goods and services over time, which erodes the purchasing power of your money. Investing can help your wealth grow faster than inflation, preserving your financial stability.

Tips To Start Investing in Your 20s

1. Start Investing Right Away: Time is of the essence when it comes to investing. The earlier you start, the more your money can grow. Even if you can only invest a small amount to start with, it’s better to begin now rather than wait for the “perfect” moment. Every day you delay is a missed opportunity for your money to compound.

Like in the above example, if Ramesh had started his investment at 35, he would have lost a return of more than ₹1 crore. 

2. Set Financial Goals and Plan Investments: Having a clear financial plan is crucial. Start by identifying your short-term and long-term financial goals, such as repaying your education loan, buying a house, funding your children’s education,, or retiring comfortably. Once you have these goals in place, you can structure your investments accordingly.

Don’t forget to maintain an emergency fund of at least 3 to 6 months’ worth of living expenses.

3. Invest First, Spend Later: One of the most effective financial strategies is to allocate a portion of your income to investments before you spend it. One way is to automate your investments by setting up systematic investment plans (SIPs) in mutual funds. This ensures that you prioritise your future financial security over impulsive expenses.

For instance, you can set up a SIP that deducts a certain amount, say ₹10,000, from your salary/income every month. This disciplined approach will allow you to accumulate wealth consistently.

4. Capitalise on the Power of Compounding: The power of compounding is your best friend when investing in your 20s. It means that your money earns returns on both the principal and the previous returns. Over time, this can result in exponential growth. Even small contributions can lead to substantial wealth accumulation.

Example: You can start investing with a minimum of ₹100 per month in any mutual fund. If you stay disciplined with your investments for the next 30 years, you will earn a return of more than 9x your total investment. Assuming an average annual return of 12% 

5. The 50:30:20 Rule: The 50:30:20 rule is a popular budgeting guideline. Allocate 50% of your income to essential expenses like rent, groceries, and utilities, 30% to discretionary spending (dining out, entertainment); and 20% to savings and investments. This balanced approach ensures you save and invest a significant portion of your income while still enjoying your life.
6. Build a Retirement Plan: Young investors often overlook retirement planning. But investing for retirement in your 20s gives you the advantage of time to build a substantial fund. One of India’s safest and most tax-efficient retirement savings options is the Public Provident Fund (PPF). Additionally, don’t forget to invest in insurance to protect yourself and your loved ones against unforeseen circumstances.

Investment Options for Investors in Their 20s

There are many options for those looking to start investing in their 20s. The best thing is that you have fewer family responsibilities and a long time before retirement, allowing you to take higher risks and invest a major portion of your income. Let’s delve into investment options without further ado.

1. Mutual Funds: Mutual funds are a fantastic way to tap into the potential of the stock and debt markets without extensive market knowledge. These funds pool money from numerous investors and create diversified portfolios of stocks. Over the long term, equity mutual funds have the potential to yield higher returns.

• Minimum Investment: ₹100
• Income/Returns: Capital Appreciation and Dividends

• Taxation: Capital gains tax and dividend distribution taxation. You can also claim a tax deduction of ₹1.5 lakh by investing in ELSS funds.

2. Public Provident Fund (PPF): The PPF is a government-backed savings scheme offering tax benefits and interest on the investment. While it has a 15-year lock-in period, it can be extended in blocks of 5 years. Investing in a PPF account is an ideal choice for long-term savings and retirement planning as it enjoys EEE tax status. Meaning your investment, return and maturity proceeds are all exempt.

• Minimum Investment: ₹500
• Income/Returns: Compounding returns with an interest rate are announced quarterly.
• Taxation: Tax-free on withdrawals. Eligible for deductions up to ₹1.5 lakh under Section 80C.

3. National Pension System (NPS): The NPS is a government-sponsored voluntary pension scheme that aids in building a retirement corpus. It offers a mix of equity and debt investments, providing an opportunity for higher returns while maintaining stability.

• Minimum Investment: ₹500
• Income/Returns: Compounding returns linked to market securities.
• Taxation: As per applicable income tax slab rate. Eligible for deductions upto ₹2 lakh under Section 80C and 80CCD

4. Stocks: Directly investing in stocks necessitates a good grasp of the market and a willingness to research and monitor your investments. It can be highly rewarding, yet it comes with higher risk. To mitigate this, consider diversifying your stock portfolio. Stocks offer potential for long-term growth, dividend income, diversification, and company ownership. 

• Minimum Investment: More than ₹0.
• Income/Returns: Returns linked to market securities and dividends

• Taxation: Capital gains taxation, dividends taxed with TDS of 10%, if above ₹5,000.

• • Short term capital gain: 15%
  • Long term capital gain: 0% for first ₹1 lakh and @10% exceeding ₹1 lakh

5. Alternative Investments: For those who seek riskier alternatives, options like cryptocurrencies, NFTs, and even investing in sneakers or startup equity can be intriguing. However, these should be approached with caution, as they can be volatile and speculative.

• Income/Returns: Varies
• Taxation: Varies 

6. Gold: Gold is regarded as a safe-haven asset and a hedge against inflation. You can invest in physical gold, such as jewellery or coins, or explore financial products like gold ETFs (Exchange-Traded Funds) and sovereign gold bonds.

• Income/Returns: Capital appreciation  
• Taxation: Varies 

7. Real Estate: Real estate investment, though capital-intensive, can be a substantial long-term wealth builder. It involves purchasing residential or commercial properties for rental income or capital appreciation. You can also have fractional ownership in commercial real estate to have better returns with a lower initial investment. To ease the process, you can also invest via real estate ETFs.

• Income/Returns: Capital appreciation, rental income 

• Taxation: Varies 

Conclusion

In your 20s, the key is to find the right investment avenue that aligns with your financial goals, risk tolerance, and time horizon. Diversification is a wise strategy, spreading your investments across various asset classes to mitigate risks and optimise returns.

Remember, there is no one-size-fits-all approach to investing. What suits one person may not suit another. It’s essential to assess your own financial situation and consult with a financial advisor if needed. 

With a bunch of investment options available in today’s market, you can tailor your investment strategy to fit your aspirations and pave the way for a more financially secure future. So, start early, invest wisely, and reap the rewards of a financially secure life. Open your demat account with Angel One today!

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