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  • Investing Early: How Should a College Student Invest?

    Published on May 30, 2019

    Do you know that Warren Buffet, one of the most successful investors in the world, made his first investment in equity in the age of 11? Similarly, Philip Fisher, who is called the father of investing in growth stocks, started with his investment firm at the age of 21.

    The investment world is full of examples which suggest that one of the most important keys for long term wealth creation is starting early. So, if you are in your 20s and still in college, it is perhaps the best time to start investing to make good money in the long run. In the following sections, we will discuss some important investing lessons to help you become a successful investor and achieve your long term financial goals.

    Save as much as you can

    The most critical factor for successful investing is (obviously) SAVING ! Irrespective of your income, if you don’t save, you can’t invest. Therefore, it becomes important to cultivate the habit of savings from your early days. As a college student, you might not have a regular income, thus the only way to save is by rationalizing your expenses.

    You can start with prioritizing saving over expenditure. You can also set a monthly savings target and plan your expenses accordingly. At this stage, the quantum of saving is not as important as the habit of saving consistently. Also never forget a cardinal rule – “Never Borrow to Invest” as this can hurt your long term returns.

    However, your savings target should not be over ambitious but practical. If you have spare time, you can also generate some cash flows by working part-time. What you invest in matters less than the fact that you have decided to save and invest.

    Understand the Power of Compounding

    The great Albert Einstein has termed the power of compounding as the eighth wonder of the world. Compound interest is known as the most powerful force in the financial world. In case you are young, your greatest financial asset is time and compounding favours those who have time on their side! If you squander the time by not investing early, you are losing a big asset!

    Let’s say that your friend Ram started investing in Rs. 1000 per month in mutual funds at the age of 20 and you were the latecomer who started investing Rs. 1500 per month in mutual funds only but at the age of 30. Now, assuming that you both are regular at your contribution and redeem your funds only at the age of 60 years, you will be able to build a corpus of about Rs. 1 crore (assuming 12% ROI) while Ram will be redeeming a corpus of Rs. 3 crore (assuming the same ROI)!  Ram was able to build a corpus three times yours despite you being making a 1.5 times contribution as compared to Ram. This is how the power of compounding helps you when you start investing early.

    Pay Your Dues on Time

    This is a simple but powerful principle that you can follow to be really successful at investing. It is important to recognise the importance of paying your dues on time at a young age. This habit will bear fruit in the future as you would develop a sense of maintaining credit discipline which will also save you from falling into a debt trap. Timely payment of dues and avoidance of borrowings are two key attributes of a good financial planner.

    Retirement Planning

    It may look odd to you to plan for your retirement when you are in college but this is the best time for retirement planning. Saving for retirement from the age of 20 onwards rather than at the age of 40 is always a better idea. When you are younger, you have fewer financial responsibilities and therefore, you can easily go for a long term planning. Further, the power of compounding will work in favour of your retirement planning.

    This way, you can build a large corpus and secure your retirement even with a small amount of contribution. Depending on your risk appetite, you can consider investing in a fixed return instrument such as Public Provident Fund (PPF) or a market-linked product such as the National Pension System (NPS). Being long term investment options, retirement planning by investing in market-linked products such as NPS or retirement mutual funds, can help you earn smart returns and minimize your overall investment risk.

    Create an Emergency Fund

    It is always financially prudent to create an emergency fund as soon as possible. It is true that you may face some difficulties to invest in such a young age as you might not have a regular source of income but you should make an effort to start planning for this as early as possible. Having an emergency fund is again one of the fundamental principles of investing.

    You may start with an emergency fund as small as Rs. 5000 and grow it over a period of time. Here too, the idea is not about the amount that you have contributed towards your emergency fund but the need to start an emergency fund in itself. Once you develop a habit of contributing to the fund, no matter how small the individual contribution, your emergency fund will grow and help you in facing various financial uncertainties that life may throw at you.

    You can also make smart returns on your emergency fund by investing it in liquid funds or by simply keeping it in your saving bank account. Ideally, your emergency funds should be invested in safe and liquid assets, so that you can easily redeem it at the time of need.

    Invest in Yourself

    Last but not least, it is important to keep investing in yourself. You need to realize the fact that money is just a means for reaching your goals, it is not an end in itself. While it is important to save some part of it and invest and reinvest it to create long term wealth, it is also equally important to keep investing in your personal, professional and financial growth. Investments made to make yourself better will pay dividends through your entire life. Basically, it is a guaranteed returns plan! So be realistic, patient and consistent when you start saving early in life so that the power of compounding can yield benefits in the long term.