This story is a prequel to our previous issue of December 2018, where we helped readers to plan and prepare financially for their retirement. Whereas, the focus this time is on planning your finances from the start of your career till mid or late forties.
Today, with well over 25 years since the adoption of economic reforms, India has grown from $0.3 trillion economy to $2.8 trillion economy. This has resulted in an increase in the purchasing power of people, especially in Tier I and II cities. The post reform generation, who are in their twenties, is earning much more than the previous one. Also with better avenues and income, their spending and investment habits have changed. Taking cognisance of this, Outlook Money has decided to help millennials plan their finances and investments.
The most clichéd phrase used by planners is to start the investments as early as possible. Sonali Pradhan, Head of Wealth Management, Julius Baer Wealth Advisors, explained why. According to her, investments can create an alternate source of income through steady returns. “Objectives and needs should be the deriving factors for investments,” she said. But does anyone take this seriously in their twenties? Bhagyashree Pradhan, 26, journalist from Mumbai, does not invest. “I only have three LIC policies - endowment plans, which my father made for me,” she said. According to Jayesh Faria, Senior Executive Group VP, Motilal Oswal Private Wealth Management, “The new found monetary independence comes with many wish lists. At this age, life’s financial equation needs to be understood clearly. Generally, it is followed as Income minus Expenses equals Savings, instead of Income minus Savings equals Expenses, which is the correct equation.”
He added that spending on immediate luxury takes over all other priorities and the thought of saving or investing is only from a short-term perspective instead of long-term compounding. Ankur Maheshwari, CEO, Equirus Wealth Management, agreed to this as he believes that millennials should take advantage of their age and risk appetite to start investing early. “Their investment philosophy should be that of a disciplined savings approach with a long-term investment horizon and an asset allocation strategy relatively skewed towards equity,” he said. In addition to this, he stated that it is equally important to include adequate life insurance cover – term and health insurance.
According to Vikram Chhokar, Regional Head, North and East of Wealth Management, Karvy Private Wealth, ULIPs with 100 per cent equity option, EPF, PPF, SIP in equity funds and NPS are some of the good options at the start of the career.
According to wealth managers, if your finances are well planned in your 20s, then the 30s would be better, given that it is the age of increasing responsibilities. At this stage, one plans to settle down, buy a house, car, get married, and have children. This increases the strain on the exchequer, although the salaries grow exponentially. Piyush Tewari, 29, public relation professional, is approaching a new stage of life, where he is planning to settle down. “I came to Mumbai seven years back and for the first two years, I was not financially aware. But since then, I have planned my finances well enough to start a family and live a decent life.” Today, he is financially disciplined and has divided his finances in three parts - health, life and investments.
According to Rajesh Cheruvu, Chief Investment Officer, WCG wealth, “People in their 30s have relatively lesser scope in terms of life and lifestyle goals versus millennials, however, investors still have 30 years horizon for building a terminal retirement corpus.” The investor may have to step up allocation towards high growth asset classes like equity and sub asset classes like mid cap and may further also need to catch-up.
The exposure to equity asset classes at different age groups is a contentious issue. Maheshwari gives a thumb rule- equity exposure is (100 minus age) represented as per cent, individuals could consider this percentage as a guiding principle. He believes that a person at 30 has a basic risk appetite and, at the same time, his understanding of the capital markets is little more evolved. “An individual could consider investing in offshore products. They help increase diversification benefits and start providing corpus for overseas education for children,” he said. Another important aspect which the planners highlight for an individual in their 30s is a contingency fund. However, they differ in the fund value from three to nine months of expenses.
As one moves from 30s to 40s, the priorities change. Now an individual focuses on big house, children’s education and retirement.
Chhokar said that in the current environment, individuals should be equity heavy from 20s to 40s. “But look at reducing the risk by moving to large caps as one gets closer to the 50s. There should be no significant shift from equity to debt in the 40s,” he said. He cautions about inadequate health (insurance) and contingency (funds) in the 40s and also warns about under estimation of children’s education cost, bonus and incentive spent on consumption and shift from equity to debt too early for people in their 40s.
Two thing that Outlook Money noticed while talking to planners and industry experts is the power of compounding and the mistake of not starting early. Besides, unaware investments can be an additional folly. “Delaying investments does cost the investor dearly in the long-term. Power of compounding is particularly important when a millennial start investing early,” said Maheshwari. This, he explains with the help of a table (above).
As visible from the table, assuming that one starts investing by early 20s, by the end of 40s or early 50s his corpus would be considerable.
To sum it up, early investments, right investments at the right age, diversification of investments, to stay invested in an asset class for a long time- especially equity and preparing for future with the right kind of investments are important financial decisions to take from 20s till 40s. Such financial discipline would help an individual to reap benefits in 50s and after retirement.