The experience of receiving the first salary remains etched in our memory for a very long time. After all, it marks our beginning in work life, which dictates the way we maintain our lifestyle. But how do people use their first salary? Well, some could give it to their parents, some could spend on parties and some could invest too. Making investments from the very first salary might sound strange to you. But if done properly, you can accumulate big and fulfill your goals much faster than others. However, investments fetch better results when they are perfectly aligned with your goals, which can be buying a home or car, creating a corpus for retirement, etc.
Besides goals, you also need to look at your present income before deciding on an investment plan for yourself. At the same time, be flexible in your approach when things don’t go the way you may have expected in the beginning. Following these investment principles will help you succeed in your life.
So, if you are about to start your work life and want to invest from the time you receive your first salary, read this post to know how you should begin and take it along from there.
Be Slow and Steady in the Beginning – Invest in Banking Deposits
At the beginning of your career, you will most likely go slowly, which means not trying hands in the volatility of equities even as they can make your money bigger than any other financial instrument. At the start, look to park your hard-earned money in banking deposits such as fixed deposits, recurring deposits and savings accounts. These instruments come with a fixed rate of interest and make you feel good in the beginning.
A Few Years Later, Start Investing in Products Best Suited to Achieve Your Goal
After having earned something on your investment made for a few years post your first salary, you could put your money in some other instruments that can help achieve your financial goals easily. If you have ambitious goals like having a home or car, you will need to put a reasonably greater amount in equities. Now, you have a choice to make – whether to dive directly in equities or do it via mutual funds. If you know the stock market well and can read the impact of economic and market developments correctly, you can invest directly. If not, invest via mutual funds and rely on the expertise of fund managers to propel your investments through the market fluctuation. Your risk appetite needs to be high if you are investing in equities.
You might not generate enough to buy a home or car with investments alone. But at least, you can have the down payment ready with these. Yes, both home and car are not financed fully by banks and financial institutions. Loans are offered upto 75%-90% of the value of these possessions. You will need to pay the remaining (down payment amount) to live these luxuries. Given that such possessions command a high price, the down payment can be quite an amount. This is where your investments will come to use.
Look to Create Corpus for Child Education
You will also come to a stage where your priority will be to accumulate funds for the education of your children. It is as important as enjoying the luxuries of home and car. The cost of higher studies in India and overseas is quite high and is expected to go up further over the years. On average, a 4-year engineering course costs around INR 5-20 lakh, depending on the reputation of the college/university. On the other hand, an MBBS course can cost you INR 20 lakh to beyond INR 1 crore if your kid is admitted to a good institute but is privately held. However, the cost is not going to stay like this – it will move up year-on-year. So, consider an annual price hike of 5% and see where it will be by the time your kid is ready to go for higher studies.
Considering the massive cost involved in higher education, investing mostly in equity mutual funds will make sense. You might not accumulate the required sum given that equity investments fluctuate. But you could still have a handsome bounty for your child’s education. If you combine it with the investments made in safer instruments such as fixed deposits and debt mutual funds, you will most likely have the education corpus ready.
If the institute to which your child gets admitted remains a good one with an outstanding placement record, an education loan can be given to your kid too. You might ask, why should I invest for my child’s education when there are banks ready to finance it? Investment corpus will ensure a massive reduction in the loan amount and subsequent interest payments that your kid will need to do after completing his/her education.
Retirement Planning – A Must from an Early Age
Retirement relieves you from the hectic work routine that you undergo for about 30 years, but not from the tension if you could not muster the required corpus to live your retirement days comfortably. This is where investing from the time of getting your first salary can make a difference. You will have invested for more time compared to someone who started investing late, thereby creating more corpus for living your retirement days. But how can you gauge the corpus that can help you live peacefully after retirement? You will need to consider factors like inflation, current income, etc, to decide so. Plan by keeping in mind the annual inflation rate of 5%. In case your current income allows it to accumulate corpus at more than the rate you see, don’t hesitate. You could only generate more by doing this. The incremental growth in your income should help you generate wealth using this approach.
Returns Expected from Different Financial Instruments
Knowing beforehand the returns you can expect from different financial instruments will help you decide the investment amount correctly. In case your salary does not remain the one that can help you invest with the amount needed to achieve your goal, you can make additional investments using the annual growth in your income. Let’s check out how returns could fare across mutual funds and fixed deposits.
|Equity Mutual Funds
|Not Fixed, but can be around 12% and above over the long term
|Debt Mutual Funds
|Not Fixed, but can be around 7%-9%
|Fixed Deposits & Recurring Deposits
|3%-7% (It varies from bank to bank)
How to Invest in Mutual Funds and Other Financial Instruments?
So far, you have come to know that mutual funds and banking deposits are the ones to help you through various stages of your life. But how can you invest in these products? You can do so on the website of Asset Management Companies (AMCs) if you want to invest in mutual funds. You have a choice to make – a lump sum or an SIP investment. Since it’s about investing from the very first salary, you might not have one bulk sum at that time to invest via a lump sum. This is where a Systematic Investment Plan (SIP) allowing monthly investment with an amount as low as INR 500 can be a perfect choice for you. It will create an investment discipline and help accumulate the corpus you look for.
To open a fixed deposit and recurring deposit, you could either visit the bank branch or use net banking. Whichever way you go, you will need to fill the fixed deposit application form mentioning the deposit amount, the period of deposit, etc. A fixed deposit is a lump sum amount you park in for a specific period, whereas recurring deposits mean depositing a specific amount every month for the time you wish to.