I was recently quoted in Economic Times WEALTH (1-7 July 2024) in the Q&A section where a panel of experts answers readers’ questions related to various aspects of their personal finances.
The exact question and the answer –
Here is the text version of the query and the reply –
Q – I’m turning 20 this month, and my dad, who is currently 54 years old, plans to retire in 3-4 years. I’m in my third year of pursuing an Engineering degree, with 2 more years to go before I start looking for a job. I’m keen on saving and growing wealth. I’ve already invested about Rs 1.5 lakhs in Mutual Funds and started trading stocks about 2-3 months ago. I can allocate approximately Rs 3,000 monthly for SIPs or investments. How can I build wealth over the next 4-5 years? My goal is to beat inflation and secure emergency funds as well.
A – It is rare to see such a sincere intent in someone so young towards taking control of their financial life. You have mentioned that you will start earning in a couple of years when your engineering course is complete. So that is when your real cash inflows will begin. Till then, you have said that you can invest close to Rs 3000 monthly.
Now this may sound odd coming from an advisor but let me say this – Over the next 2 years, your primary responsibility is to focus on your ongoing education and career and ensure that you get a well-paying job after 2 years. Remember that your greatest asset is your professional capital and how you use it to generate income in future. So, if need be, to upskill or do extra courses in that regard, then it is perfectly fine to use your monthly savings surplus to do that instead of saving it! A good compensation package and job profile in the first job straight after college go a long way in deciding your future career trajectory. So that should be your priority as of now.
But if you still want to use this Rs 3000 monthly to invest and build wealth over the next 5+ years, then start a SIP in a Flexicap/Multicap Fund. Pick just one scheme from the given category and those which have proven vintage. This is in addition to the Rs 1.5 lakh that is already invested in mutual funds. Also, as you get a job after 2 years and your monthly surplus increases significantly, make sure to increase your monthly investments proportionately.
You mentioned that you have started trading in stocks. This can be rewarding if one gets it right. But it isn’t as easy as it is made out to be on social media. My apologies for being a mood-killer but the fact is that more than 90% of traders don’t make money in markets. Not trying to demoralize but that is one statistic (provided by the regulator SEBI) that needs to be kept in mind.
The details of any short-term savings like FDs, etc., are not known. But if having an emergency fund is also a goal, then generally you should look at having an emergency fund which is sufficient for at least 6 months’ worth of your monthly expenses. If you have some FDs, then they can also act as an emergency and as an ongoing liquidity reserve.
Given the limited monthly surplus of Rs 3000, you will have to decide whether you want to first pursue building up an emergency fund (via RD, FD, or debt funds) or go for wealth creation of sorts via SIP as discussed earlier.
You should also have a PPF account opened (if not already). This will help start the 15-year lock-in period and help later on when you are on the job and looking for options to save in debt instruments.