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An investment plan for millennials

If you have recently started your career and are wondering how to proceed towards financial independence, here is a roadmap

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A Balasubramanian, MD and CEO Aditya Birla Sun Life AMC and Dhirendra Kumar, CEO, Value Research, guide millennials on their journey to financial independence in a freewheeling conversation with KS Rao, Head - Investor Education, Aditya Birla Sun Life AMC, in the 100th episode of Investors' Hangout. Here are some excerpts from their discussion:

KS Rao: Bala, I am sure your first pay cheque would have been special. If you can tell us how long ago you got it? And what did you do with it?

Bala: It was quite interesting, actually. I got my first pay cheque in the early 90's or late 80's. Salary levels were not as high as we are seeing today. The first pay cheque, naturally in those days, as we all used to practice and were advised by our own parents, went to God.

Then, I subscribed to SIPs. The company had given an option to subscribe for it. So I broke Rs 1,200 in three parts. The first Rs 400 went into ELSS and the remaining Rs 800 in various equity schemes. Those SIPs are still being continued. That's what I did with it and believe me, it only got multiplied. You start SIPs with a small amount, be regular, and as your salary level increases, keep increasing the SIP amount. That's how SIPs became part of my portfolio.

KS Rao: Dhirendra, you also keep preaching about starting early. What's the reason behind it?

Dhirendra: You don't get to appreciate the magic of compounding by not starting early. Saving and investing is a habit. It is not a function of scale. And in most cases, people find an excuse for not saving. The first and foremost is why save, let's have fun. The other is - I can spare absolutely nothing. I will save when I have something significant. But what happens is that by doing so you are not able to experience and benefit from the magic of compounding.

I would say that you should just get started, irrespective of whether you are knowledgeable about the market or not, or the amount you can save is small or big. Just get started with a balanced (aggressive hybrid) fund.

It will help you accumulate something which you didn't have in the first place. Also, postponing trivial spending and saving a small amount from an early age would help you understand the value of money and form the habit of saving.

That habit once formed is very difficult to reverse. It is exactly the opposite habit of spending. On the other hand, if you get into the habit of spending, it will be very difficult for you to save.

KS Rao: What would be the right asset allocation for millennials?

Bala: The word millennial itself is a reflection of young age. Youth have a long innings to play. You have to create wealth which would be there for generations. Naturally, your allocation towards equity has to be a lot higher when you start. When you get a job, you start building your basic needs and spend that money. But at the same time, you need to also start saving.

Don't worry about market fluctuations. Given the time on your hands, the money for your retirement is going to be invested for the long term. So 100 per cent of the money should be put in equity. And be regular, keep saving every month. That is the only way millennials can create wealth in the long term. As you come closer to 40 or 50, then you can keep ticking your allocations depending upon your aspirations.

KS Rao: But as I see, for them the challenge is that they want to buy the latest gadgets instead of starting to invest. Should they postpone their consumption?

Dhirendra: Don't postpone your consumption. These days, people start with a decent income, unlike 20-30 years back. As Bala mentioned, when he got his first salary, it was not very sizeable. But now, when people start their career, they have surplus. But at the same time, avenues to spend have grown substantially. And there are easy EMIs available which help you buy almost anything.

But one should decide what is important and what is not. Also, they should just make a conservative estimate of the portion of their income which they feel can be saved conveniently every month. Whether it be 10 per cent or 25 per cent. Just stick and invest it every month before spending. It will help you create a really meaningful amount.

KS Rao: Do you mean to say that they should have some kind of financial plan? How would you suggest they go forward?

Dhirendra: There is a hierarchy of things. One is to have some emergency money which would depend on your own circumstances. It can be kept in layers, from some amount in your locker, to a bank account and then in a liquid fund. In some cases, some part of it can be well kept in a debt-oriented hybrid fund too. You may not have to use your emergency money for years. So, it is also your long-term money. Creating an emergency corpus should be your first priority.

Number two, comes health insurance. Because that is something which can derail your entire savings plan. Bad health and hospitalisation can completely put it off road. Third is, if you have financial dependants, you should definitely buy a term plan. Term insurance is the cheapest way to buy protection for your family. After all these things, as Bala said, invest for the long term. Invest in equity and forget it for the next three to five years. Don't look at it every day.

KS Rao: Dhirendra, would you like to suggest anything else to the millennials watching?

Start now! It will be a good problem that you have accumulated something but your investment choices didn't turn out that good. But if you don't start, it will never happen. These hybrid funds are a great way for somebody who is uninitiated or not used to how the market behaves. Markets turn out to be very rewarding. But in the short run, they prove to be very devastating as it may drive you out of the market. The way to actually experience it is in a manner that it becomes acceptable to you.

Balanced funds (aggressive hybrid) are a great way to do that. You are able to take a very steady take on that. Your money grows well as around 75 per cent of your money is in equity. But it doesn't really collapse the way equity does as they have 25-30 per cent shock absorbing fixed income. And that makes it little more acceptable. For your long-term money, give up on the excuse, and start investing in a balanced fund. Also, don't let your contributions remain constant. As your income rises, increase your investments.

KS Rao: This is the last question for you Bala. What do you suggest these millennials do on the tax front?

Bala: As I mentioned earlier, they have a long game to play and at the same time every individual comes in the tax bracket these days. So, definitely tax planning has to be one of the ways of investing first. For saving taxes and creating a long-term portfolio, ELSS plays a very important role compared to any other option. They should invest in ELSS to fulfil all these three things. Also, as Dhirendra mentioned, my simple advice is that starting without worrying and without giving excuses is important.