A financial literacy letter to career starters

India’s population is 1.4 billion with median age being 28.2 years. This youthful population contributes to the nation’s dynamism and energy. Life expectancy in India varies from 70-74 years, basis gender. A little over 36% of India’s population resides in urban areas.

India’s investment landscape is diverse, catering to various financial goals, risk appetites, and time horizons. They range from tax savings schemes (PPF, NPS, ELSS, ULIPs, Tax Saving Deposits), longer horizon and higher returns products (mutual funds, stock investments, IPOs), shorter horizons (fixed deposits, liquid mutual funds, ultra short term debt plans), medium term goals (ELSS, FDRs, Recurring Deposits) and longer term goals (Equity Mutual Funds, direct equity, gold, real estate, NSCs, Bonds).

On 9th April, 2024, BSE Sensex touched the 75,000 mark. It was incepted in 1979 at 100 value and has compounded at a rate of 15.85% in these 45 years. India is the fifth largest economy in the world and there is a good probability that growth rate of 15% may well sustain in future, let’s say for the next 45 years too!

With that background, let’s bring the discussion to those who are right at the beginning of their careers.

A 21 year old female, living with family in one of the metropolitans and has joined a Bank with a sound salary package. She is single, with no dependents in family. On receiving her first salary, she is delighted with both the thought and reality of having earned money.

Her financial needs so far (in form of school and college education and associated expenses) were supported by parents and extracurricular funding by the monthly pocket money, again from parents. She’s from an upper middle class family (but not lavishly rich), doing well in academics and professionally.

She balances work, family and social life adequately. Not falling in extremes of either. Her focus is to excel in the job and make a mark.

Right from my first salary, she intends to save money every month, in certain proportion to expenses and park it in a bank savings account at a certain rate of interest so that the money appreciates in value through compounding. Thereafter, by disciplined monthly savings, she creates a small corpus of investable funds. As she explores the financial investment world for the first time (beyond academics), she parks the first tranche of investable surplus in bank fixed deposit, earning a rate of interest higher than savings bank account. Simultaneously, she invests in tax savings scheme so that taxable income at the end of the year gets reduced. In the subsequent months, she invests a portion of surplus funds in tax free bonds, at a rate of interest higher than both savings account and fixed deposits and that interest earned on them is tax free. The above sequence of investments suits her risk appetite and behavior.

Given her single status and with no immediate / foreseeable liabilities, she is adequately covered on insurance through her employer. Hence, she defers plans to buy another insurance, at least for 12 months.

After a year or so, on reviewing her financial and investment positions, she takes a home loan for 20 years with an EMI that fits her monthly budget.

So at age of 22-23 years, she has a savings bank account balance (short term liquidity), fixed deposits (short to medium term liquidity), bonds (medium to long term investment), an insurance and a property through home loan.

With each passing day, she is increasingly interested in capital markets and opens a demat account and parks her bonds digitally in it. She follows the trends to understand how investments and markets are doing.

It is time now to diversify asset allocation in products that are growth oriented and can yield slightly higher returns, i.e. equity mutual funds and direct equity. These products have no principal protection guarantee (as against the products in portfolio).

She now invests in equity mutual funds while market was correcting. Incremental investments are being made through a periodic systematic investment plan. Over the next few months, she has both understood and become comfortable with mutual funds in the portfolio.

The next stage is to venture in direct equity investments. Her investment approach remains knowledge, information and research-based.

So in the first 5 years of stepping into the real world, she has created a remarkably diversified investment portfolio.

She now reviews her portfolio actively, periodically and leverages strategic asset allocation at the core of her investment philosophy. She does not get jostled by market corrections, nor swayed by the excitement of markets peaking from time to time.

As part of her overall financial planning over the years, she opts for insurance as well.

With a goal of a certain investment returns, her portfolio is well diversified between debt and equity, short to long term, liquid and growth oriented, taxable and tax free income, etc.

She has been practicing a monthly budgeting exercise. Her portfolio provides for adequate cushion for liquidity, growth, appreciation, regular income while liabilities are well under control.

She has also created an emergency fund that can take care of 6-9 months of expenses should anything untoward happens to her regular source(s) of income.

If the markets in India are expected to yield an average 15-16% return year on year, she hopes for similar returns on her portfolio. She is 25 years old and has at least 35 years of working life ahead. As she ages, she needs to start planning for retirement savings too.

So the financial literacy lessons are:

-Start early and start saving in investment journey

-Create budget, review, monitor, recalibrate on the go

-Invest in financial education, dedicate time, be hungry to learn

-Invest strategically and diversify the asset allocation

-Most importantly, enjoy the rewards from time to time

Some of the other core principles are:

-Start small, scale later

-Be passionate and drive purpose

-Digital skills are gold

-Make steady efforts for success and adapt

-Learn from failures. Understand risk

-Celebrate milestones and stay humble