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Invest Young for a Bright Future

Posted in Finance Articles, Total Reads: 2450 , Published on November 30, 2013

Ritesh, software professional works in an MNC in Bangalore. It’s been only 4 months since he joined the company as a fresher. As a beginner he is paid well by the company. He lives with his friends in a luxurious apartment and enjoys all the things the city has to offer. The things seem to be going well for him. He is a guy who dreams big and wants to live a comfortable life with all the amenities at his disposal.

It’s nearing the end of month and he notices that even after enjoying the life he is able to save some amount of money. However, he really does not have a clue what to do about that money he is left with. Unfortunately, this is the story of many professionals like Ritesh.

Image Courtesy: Sujin Jetkasettakorn, freedigitalphotos.net

It’s important to know that each and every individual has some specific requirements. Some want to buy flat, some want to go for a long vacation, some wants to study further, some want to save money for their marriage etc. The key challenge is how to grow the money which you are saving. Keeping it in the savings bank account which gives you return @ 4-6% will not really suffice. The beginning phase of anyone’s career is really crucial as one is not earning handsome amount and at the same time he/she needs to grow money for his/her future aspirations. The question comes to the mind that where to start from?

There are plenty of investment options which can be used such as PPF, Fixed deposits (FD), Recurring deposits (RD), Stocks, Bonds, mutual funds, Real estate etc. Most of the early beginners go about doing an FD or RD. However it is important to know that the young age is the age where maximum risk can be taken as most of the people do not have any responsibilities. The younger you are, the more appetite for risk you should have. As the person gets married and raises the family his risk appetite decreases to certain extent as he moves towards stability.

Here is a table which gives a good idea of investing instruments and also for what period of time they are suitable for:



Risk-Return Factor

Short Term(less than 3 years)

Fixed Deposit(FD)

Min. Risk - Moderate Return

Recurring Deposit(RD)

Min. Risk - Moderate Return


High Risk- High Return


Min. Risk - Moderate Return

Medium Term(3-7 years)

Fixed Deposit(FD)

Min. Risk - Moderate Return

Recurring Deposit(RD)

Min. Risk - Moderate Return


High Risk- High Return

Fixed Maturity Plan(FMP)

High Risk- High Return

Long Term ( 7 years and above)

Systematic Investment Plan(SIP)

Moderate/High Risk- High Return

Public Provident Fund(PPF)

Min. Risk - Moderate Return

Real Estate

Moderate Risk - High Return


High Risk- High Return

Understanding the Investment Options

Fixed Deposits:  A fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date.

Recurring Deposits: Recurring Deposits are a special kind of Term Deposits offered by banks in India which help people with regular incomes to deposit a fixedamount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It is similar to making FDs of a certain amount in monthly instalments.

Bonds: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and foreign governments to finance a variety of projects and activities. Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries."

Systematic Investment Plan (SIP): It is a process of investing money regularly in the mutual funds. Doing a Systematic Investment Plan (SIP) in the mutual funds is great instrument to grow your money at an early age. It is generally done in three types of mutual funds: Equity, Debt and Hybrid. One must go for equity funds at the early years of the career. Equity funds are directly linked to the market so they have high risk but at the same time give handsome returns.

How it works?

It works on the principle of compounding. When you invest money in some fund, every fund has some Net Asset Value (NAV). Depending upon the NAV you get some units of that fund. So a person keeps on accumulating the number of units. The best part of SIP is that it investing a fixed amount regularly helps you in averaging the cost. Say, you invest Rs 1,000 a month. And, the price of the chosen scheme unit is Rs 10 in the first month. You will get 100 units. Next month, the unit price falls to Rs 9 and you are allotted 111 units. In the third month, the price drops further to Rs 8, getting you 125 units. Thus, by investing Rs 3,000 over three months, you have got 336 units.

In contrast, had you invested the entire amount in the first month itself, you would have garnered just 300 units.

The advantage of doing SIP for long term is it negates the effects of the market cycles and provides you the desired returns from which you can plan things like child’s education, marriage, retirement corpus etc. Let‘s take an example to know about the power of compounding.

The following table gives data about a person investing certain amount of money for 25 years with a growth rate of 15%. You can calculate how much difference it makes if he invests 5000 per month and when he invests 2000 less.

Growth Rate 15%

Total Amount Saved

Value after 25 years

Amount Saved Per Month










Effect of beginning early in SIP: Investor A starts investing 1000 every month at the age of 25 and investor B starts investing 1000/month at 35.


You can clearly notice the difference of starting early. A difference of Rs just Rs 1.2 lakh (Rs 4.2 lakh minus Rs 3.0 lakh) between the two of them will result in a huge difference of Rs 115.8 lakh in their wealth when they reach 60 years of age. (Annual rate of return is assumed to be 15%).

Public Provident Fund (PPF): It is tax and saving instrument. It is one of the best tools to be used as retirement planning. It requires you to open an account in designated post offices, SBI branches and some other nationalised banks. Some key facts about PPF are as listed:

  • It has a lock in period of 15 years...
  • You can have an income tax exemption under 80C section. The entire maturity amount including the interest is non-taxable, which is the biggest benefit of PPF.
  • One can invest maximum of 1 lakh rupee in a year.
  • The current rate of return provided by PPF is 8.7%.
  • The interest rate in your PPF Account is calculated on the lowest balance between fifth and the last day of the month. So, to maximize the earnings, try making deposits between 1st and the 5th of the month. Interest is compounded annually and credited on March 31st every year.

Stocks: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred.  Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated. It is also known as "shares" or "equity."

Finally, ending this article with a quote which says “Investment is not a rocket science where a 160IQ guy beats a 130IQ guy”. Three things can make a difference and they are: “Invest Early, Invest Regularly and Invest for Long Term”.

This article has been authored by Vipul Parikh from DOMS IIT Roorkee


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