What prompted to write this article are the investing habits of young people. The younger generation generally has a good amount of disposable income and little responsibilities in terms of providing for the family, but their inquisitiveness to invest judiciously has been found to be wanting. Even my colleagues in office who are full of young people in their late twenties and early thirties working for a mutual fund information services company and thoroughly understanding of the advantages of mutual funds have been found wanting on this account. What surprised me is the fact that the only mutual fund investment most of them have ever made is in ELSS schemes with a view to avail tax breaks. A handful of them have invested in some NFOs and the rest of the savings have been either in insurance schemes on one extreme which has been prompted more out of concerns and safety, and on the other hand into direct equity investments which has been prompted more out of greed.

But, whatever be the overriding investment rationale that each individual follow, the fact of the matter is that today’s generation is more aware of the options available to them but is reluctant in make full use of it, and although consumerism may be rising and ‘Gen-X’ spending habits may be providing a great thrust to the economy, but their investment habits leaves a lot to be desired.

The article is not about the merits and demerits of the different investment avenues and the choices that people make, but about getting early off the blocks. Every investment option will at some point of time will be more attractive than the others because of the prevalent economic, capital markets or political scenario and though mutual funds as an investment vehicle has outperformed others classes over the long term, it’s the habit of starting early and investing regularly that matters more. Others facets such as investment choices, asset allocation patterns, financial planning and constant reviewing of the portfolio follow thereafter.

Now, consider this, if you start with one single investment of Rs 100 and the growth rate is 10% year-on-year, in year 25 the investment will be worth Rs 1083.47 and in year 35 it will be worth Rs 2810.24. Notice that the longer you let your money compound, the more substantial each year’s growth becomes. In this case, investment grew by Rs 983.47 in 25 years but in next 10 years it added a whopping Rs 1726.77. The growth rates are also very important, and a simple 5% average increase in returns will make a difference of a massive Rs 10507.76 in 35 years.

This is what the magic of compounding does to your money, couple this with the habit of investing regularly (like an SIP investment in mutual funds) and the results are even more amazing. The most important variable in the above table is not the growth rates, or the amount of money, but the no. of YEARS, which young executives in my office have plenty ahead of them.

For a country which has very favourable demographics and is predicted to have the highest percentage of young people by 2010, the potential is immense.

Now with the merits of early investing established, youngsters can look to build a portfolio over a period of time, which is in sync with their changing risk return appetite over the years, and what product suits them best.
A rough investment guideline for a young executive can look like this; firstly, an individual can look to start with insuring himself, as policies at early age are comparatively cheaper. Now, with basic life cover needs met, rest of the disposable income can be put in investment which are more aggressive in nature, and have the potential to deliver above average growth rates – that’s where mutual funds have great potential as they are proven long term performers - secondly, at later stages, more insurance cover may be required keeping in mind the added responsibilities and investments may be put into less aggressive funds. That’s where professional help of financial planners can be sought as there is no common formula which works for all.

Therefore, people who have just started working, or are in the early phases of their career and have little responsibilities should by all means continue to earn more - spend more , but should also take time out to think about investing the disposable money, which will help them in future to lead a comfortable and secured life.