First Diwali bonus in hand? 5 smart ways young earners can start investing

The challenge is deciding where to begin. Should you invest in mutual funds, buy stocks, put money in gold or simply keep it in a fixed deposit? And should you invest the entire bonus at once or spread it over a few months?

Financial experts say young earners should first look at their financial needs, build a safety cushion and then invest for the long term. The idea is not to chase quick returns but to make the first bonus count.

Here are five ways to get started.

1. Divide the bonus between spending, saving and investing

The first bonus deserves a celebration. But spending the entire amount may mean losing an early opportunity to build wealth. A simple way to approach it is to divide the money between immediate enjoyment, financial security and long-term investments.

Akshay Rao, Head – Products and Strategy at Tata Asset Management, suggests following a 20:30:50 framework.

“A simple starting point could be the 20:30:50 rule:
20% for celebration: Spend it guilt-free on something meaningful
30% for financial security: Build an emergency fund or repay expensive debt
50% for long-term Investing: Put the balance towards long-term goals, with mutual funds forming part of the investment journey based on risk appetite and time horizon”

The allocation need not be rigid. It can change depending on a person’s income, expenses and financial responsibilities. The important thing is to avoid treating a bonus as an extension of regular salary and allowing it to permanently increase monthly spending.

As Rao puts it, “The exact allocation can vary, but the principle should remain: enjoy some today, protect some for tomorrow and invest the rest for the future.”

2. Build an emergency fund and clear expensive debt first

Before putting money into equity mutual funds or stocks, young earners should check whether they have enough money to deal with an unexpected expense. A medical emergency, job loss or urgent family requirement can disrupt investments if there is no savings cushion.

A good starting point is to keep three months of essential expenses aside. This can gradually increase to six months as income and responsibilities grow.

Thomas Stephen, Director & Head – Preferred at Anand Rathi Share and Stock Brokers Limited, says a good thumb rule is to have three to six months of monthly expenses parked in highly liquid and least volatile investments such as fixed deposits or liquid mutual funds.

“Capital protection and liquidity are key parameters here, not returns,” he says.

Young earners should also use part of their bonus to repay expensive debt, particularly outstanding credit-card dues and high-interest personal loans. Paying off such liabilities can reduce the interest burden and improve financial flexibility.

Rao also recommends building an emergency fund of around three months of essential expenses initially and gradually taking it towards six months. He says a part of this corpus can be kept in readily accessible avenues such as overnight or liquid mutual funds.

3. Start with diversified equity mutual funds or index funds

Once the emergency fund is in place and expensive debt has been addressed, young earners can start investing for long-term goals. Those in their 20s have one important advantage: time. They can give their investments a longer period to grow and ride out market ups and downs.

“For someone in their 20s, the biggest investment advantage is not necessarily a higher salary. It is time,” says Rao.

He suggests that young investors consider diversified equity mutual funds or broad-market index funds for long-term wealth creation, depending on their risk appetite. PPF and NPS can also complement equity mutual fund investments.

The advantage of mutual funds is that investors do not have to select individual stocks themselves. Their money is invested in a portfolio managed according to the fund’s stated mandate.

Stephen also believes that a large part of the investible surplus can go towards equity-oriented investments when the investor has a long-term horizon. However, he suggests keeping most of this allocation in mutual funds rather than direct stocks.

“Most of this equity allocation should go towards mutual funds where there is a professional fund manager whose sole purpose is to generate long term compounding returns within the fund’s overall investment mandate,” he says.

Direct stocks carry company-specific risks. Young investors should consider them only if they have the time and ability to track the businesses they invest in.

4. Choose between an SIP and an STP based on your comfort with risk

A Diwali bonus is usually a one-time amount. This raises a common question for first-time investors: should they put the entire sum into an equity mutual fund or spread the investment over a few months?

One option is a Systematic Investment Plan, or SIP, funded through regular monthly income. This helps investors build a habit of investing a fixed amount every month.

For someone who wants to invest the bonus itself, a Systematic Transfer Plan, or STP, can be considered. Under this route, the money is first parked in a liquid mutual fund and then transferred to an equity-oriented mutual fund in instalments at pre-decided intervals.

Stephen suggests this approach for investors who are uncomfortable putting the entire bonus into equity markets at one time.

“If the festival bonus is the only surplus available for investments, then it would be prudent to invest it via Systematic Transfer Plan (STP) where the investment could be spread out over a few months,” he says.

Rao says the decision between a lump-sum investment and staggered investing should depend on the investor’s preparedness rather than an attempt to predict market movements. Those who are uncomfortable with volatility can stagger their equity allocation over three to six months while starting a regular SIP immediately.

The key is to begin and remain consistent rather than wait indefinitely for the right market level.

5. Keep some money in safer options and avoid chasing hot tips

A young investor’s portfolio does not have to be entirely equity-oriented. Fixed deposits and gold can also have a place, depending on the person’s goals and risk appetite.

Stephen says gold can provide a natural hedge against inflation, while fixed deposits offer liquidity and peace of mind. Both can help smoothen portfolio volatility, particularly when a portfolio has a significant equity allocation.

However, the choice should depend on when the money is needed. Money required in the near term should not be exposed to high market risk.

Young investors should also be careful about taking investment decisions based on social media recommendations or recent market performance. A stock or fund that has delivered high returns recently may not necessarily continue to do so.

Rao lists buying products that one does not understand, acting on social-media tips, investing without addressing high-cost debt and locking away money needed in the near term among the common mistakes to avoid.

Stephen also cautions against chasing high-risk opportunities or relying on unverified recommendations.

“Investing purely basis exorbitant recent performances or depending on unverified recommendations can end up terrible in the long run,” he says.

Make the first bonus the start of a habit

The first Diwali bonus may not be a large amount, but the financial habits built with it can matter far more over time. Young earners do not need to create a complicated portfolio or invest in every available asset class.

Start with financial security, choose investments that match your goals and risk appetite, and build a regular investing habit. The bonus can provide the initial push. Consistency with future savings and investments will do the larger job of building wealth.

Disclaimer:
This article is for informational purposes only and should not be considered investment advice. Mutual funds, stocks and gold carry varying levels of risk. Investors should assess their financial goals, risk appetite and investment horizon before making decisions. Past performance does not guarantee future returns. Consult a qualified financial adviser if required.

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