If you are a first-time earner, where should you park you monthly savings?

You just got your first job and are expecting your salary soon. Do you want to start investing but worried about how much you can afford and where you can invest? We've got you covered. 

Cover the basics first:

Before you start investing, it is essential to cover the basics, i.e., emergency fund, term life insurance, and health insurance. Many factors, such as age, health conditions, nature of jobs, and the number of dependents, influence these decisions.

" For an emergency fund, one must park 12 months of expenses in a bank fixed deposit or savings account with a sweep-in facility. " said  said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth

 A sweep-in facility ensures that whenever funds in your Savings Account are running low for a purchase or transaction, the bank will transfer the deficit amount from your Fixed Deposit to your Savings Account without affecting your interest rate in your Fixed Deposit.

Term life insurance is as an agreement between the policyholder (insured) and the insurance company, where in case of the policyholder’s untimely demise, a specific sum is paid to the insured person’s family by the insurance company. It is the purest form of life insurance policy that offers comprehensive financial protection to your family members against life’s uncertainties.
 

"The term insurance aims to replace the loss of income for your dependents and cover all future expenses, including liabilities. As a thumb rule, the sum assured in your term insurance should be at least 17 to 20 times your annual income. Considering the health inflation, you should take health insurance with at least Rs 10 lakh sum assured policy and Rs 50 lakh- Rs 1 cr super top-up cover," said Kulkarni.
 

Once the basics are covered, a young investor should focus on wealth creation through equity investments

"Obviously, if you can spare just around Rs 1,000 per month, lumpsum investing does not add value. The best route to adopt is the SIP route. You can build up a corpus gradually and also get added benefit of rupee cost averaging. What should be the mix. The amount being small, you do not have to worry about asset allocation. However, it is always better to start right, so you can split 90:10 between an equity fund and a liquid fund; the latter for emergencies," said by Nehal Mota, Co-Founder & CEO, Finnovate, Hybrid Financial Fitness Platform.

An investor with only Rs 1000  to invest (after covering the basics) can start with a low-cost Nifty-50 index mutual fund, advises Kulkarni. Such a choice provides diverse yet robust underlying investments.

"A first timer investor who starts small, but is a salaried person, it is suggested to start in a mutual fund as a SIP. The frequency of investment matching the income flow. As far as the choice of asset class is concerned, if it is a youngster on their first job, then a 100% equity would be ideal. They can opt for an index fund or a diversified large cap scheme," said  Chaitali Dutta of Azuke Personal Finance Advisory.

What is the type of return you can expect?

On a typical multi cap fund, you can expect SIP returns of around 14-15% CAGR over a longer time frame while the returns on a liquid fund will be in the range of 4-5%. "That would translate into pre-tax returns of 13.5%. Since equity funds predominate, we can consider CAGR yield at 12% post-tax," said Mota.

If you are tight on cash, opt for a hybrid fund

However, if the person has family responsibilities and tight on cash flow, then a hybrid fund would be more suitable. 
 

"If a consultant or a business person wants to start the investment journey with a portion of his one time payment, then a staggered approach would ensure capital preservation. 50% could be put into a debt instrument like a bank FD or corporate FD, and the remaining to be invested in a few giant cap Blue chip stocks, advises Dutta. 
 

 Should do a static SIP or a stepped-up SIP?

The primary difference between a regular SIP and a step-up SIP is that the monthly investment amount does not change in a regular SIP, But it increases periodically at a predefined rate/amount in case of a step-up SIP. Total amount at the maturity is higher in step-up SIP. This is due to the simple rule of compounding.

The only issue with a static SIP investment, with respect to step up SIP, is that it does not account for a person’s increase in income-earning capacity. Hence, the savings don’t remain constant, it also increases with time. A step up SIP covers this aspect in a person’s investment and encourages you to contribute more periodically as per your capability, to maximize wealth for you in the long-run.

Finnovate has assumed 12% post-tax returns based on the asset mix. Let us now look at a SIP of Rs1,000 per month over different time frames of 10 years, 15 years and 25 years.

 You can see from the above table that a small SIP contribution of Rs1,000 becomes Rs2.32 lakhsin 10 years and Rs18.98 lakhs in 25 years.

That is the power of compounding.

"In fact, if you look at the 25 years wealth creation, you have only contributed Rs3 lakh out of the Rs18.98 lakh of portfolio, with the power of compounding creating Rs15.98 lakhs for you. However, this does look impractical. Why should a person be restricted to Rs1,000 over 25 years. Obviously, investing power will increase. Let us assume a very conservative 10% hike in the SIP contribution each year and its impact," says Mota.

Can stepped up SIP make a difference?

The above example has been slightly modified to include 10% annual SIP escalation. From the above example, it is obvious that step up SIP incorporates the power of compounding so that the investors can reach their financial goals sooner.

"Total amount at the maturity is higher in step-up SIP. This is due to the simple rule of compounding. The increased SIP compounds over time and generate higher gains compared to the regular SIP. Always choose the direct plan and growth option to avoid unnecessary commissions, reinvest the dividends, and bump the SIPs by at least 10% annually. As the income grows, you can add a Nifty-Next-50 index fund, a multi-cap fund, or even branch out to sovereign gold bonds for further diversification," said Kulkarni.

But why pick equity over other asset classes? 

Equity as an asset class has the highest probability of generating double digit rate of returns in the long run.

"Since equity as an asset class is inherently volatile, investors should adopt a strategic approach by consistently investing over an extended period. This not only helps mitigate risks associated with market fluctuations but also harnesses the power of compounding," said Harish Menon, Co-founder and head of Investments and product research at House of Alpha.

For those seeking an effective avenue to create enduring wealth, Menon recommends Index Funds as a compelling solution. Designed as a low-cost investment product, Index Funds provide access to the equity market through broader indices such as NIFTY and SENSEX. This allows investors to diversify their portfolio and tap into the growth potential of the market.

Opt for debt funds if investment horizon is short

But those with a shorter time horizon can opt for monthly SIPs (Systematic Investment Plans) in debt mutual fund schemes, avised Menon. These schemes offer the advantage of generating steady and consistent returns without exposing the capital to excessive risk.