eing in your 20s, for some, means “Work Hard, Party Hard”. For the vast majority of young urban professionals who have just started their careers, it is actually a lot more of working hard rather than partying hard.
Salaries tend to be limited at this age. Saving is difficult considering the many distractions provided by life in a big city. For the limited saving that the young have access to, deciding the best place to invest that money can be a challenging question.
“Do I go for higher risk equity or lower risk debt/FD type instruments?” Questions such as these are common. Take for instance, my friend Navin who after completing his graduation landed a job with a prestigious MNC.
As a financial advisor, I need to consider the reality of Navin’s financial situation more than what product to consider. Navin is making enough to take care of his expenses and saves Rs. 5000 to Rs. 8000 each month.
Other than what he saves each month, he doesn’t have any bulk savings. This lack of any significant financial backing means that building a short term corpus should be his top priority.
This short term corpus can’t be exposed to high volatility/high risk investments like equity.
This leaves either Fixed Deposits or Short term Debt Funds as the best option for Navin. Debt funds are an arguably useful investment avenue for young professionals just starting with their careers. Here are five reasons that explain why.
# 1. Amateurish investment pattern – Navin was new to his job and as such had a limited income. He, nevertheless, wants to own the new iPhone 6 and buy a laptop. His savings were limited and he was not sure of the regularity of his investments.
The debt fund serves as a good avenue for starting off his amateur investments to learn about his income, the related expenditure, and the corresponding saving pattern.
#2. Easy liquidity – The prime area where debt mutual funds score is their inherent liquidity. One can withdraw from the fund anytime, therefore it is an investment avenue which can be used as per the investor’s withdrawal wishes. Someone such as Navin could save for his higher education (he was keen on a MBA degree), plan his wedding or even invest the lump sum elsewhere.
#3. Growth – Though a savings account also provides liquidity, the rate of interest is low (4% per annum). The debt mutual fund, besides providing liquidity, would also provide a low risk return of around 8%.
If held for more than 3 years this investment also becomes tax efficient as indexation can be applied to the investment. This will be important as in three years the increase in salary also increases potential tax liability. This feature makes it a better alternative than fixed deposits.
#4. Emergency Fund – Having a fund ready for unforeseen purposes is a wise idea. The young lean towards spending rather than investing. As such, creating a separate emergency fund becomes a difficult endeavor. The debt fund would serve as a saving corpus which can come in handy in times of a crisis.
If you are a 20 something individual, you must be raring to go to great heights in your life and build a strong financial portfolio but you would need to start somewhere relatively safe, and a debt fund is your answer.
Want to explore debt funds? Check-out Scripbox short term money. It can help.
About the Author:
Rupanjali Mitra Basu is the Founder and Chief Training Enthusiast of FinProWise, a Financial Training and Content Shoppe. She has more than 12 years of training experience with a focus on Content in the BFSI Space.