9 Essential Investing Tips for Young Investors
Generation Z, also known as Gen Z, born between 1997 and 2012, is the future of our world. They're the first generation of ‘digital natives’ who never knew a world without the internet. They are masters of swiping, scrolling, and slaying on social media. But what about financial matters?
Gen Z, characterised by a desire for immediate gratification, often falls prey to the allure of quick wealth accumulation. This inclination has contributed to a surge in participation in high-risk investment avenues such as trading through futures and options and cryptocurrency. As per the NASDAQ survey, 73% of Gen Z own stocks and a whopping 47% own crypto stocks, making them the most common type of investment for this generation.
A report by SEBI underscores this trend, highlighting a significant increase in the proportion of young investors (aged 20-30) involved in equity derivatives from 11% in FY19 to 36% in FY22. The data reveals that a staggering 89% of these individual traders suffered losses. This emphasises the importance of long-term perspective and disciplined investment strategies in building sustainable wealth.
Here are a few tips to help Gen Z be astute investors and build wealth.
Keys to Building Wealth for Gen Z
- Set a target: To succeed in any field, you must set your sights on a target. Just like in a carrom game, you must first aim and then strike; investing in mutual funds also requires you to set an aim. Before investing, decide what you want to accomplish. Set financial objectives that are SMART—specific, measurable, attainable, realistic, and time-bound. Establishing a clear target will help you reach your financial destination.
- Choose the right product: It might be complicated to choose the right investment product because the market offers a diverse array of investing instruments, ranging from low-risk investments like fixed deposits to high-risk avenues like options and futures. However, one must choose an investment avenue that strikes a balance between risk and return. A mutual fund is one such investment avenue that can help you build wealth with moderate risk.
- Avoid Debt Traps: A debt trap is a dangerous cycle where you borrow money to repay existing debt, digging deeper into financial trouble. This can happen to anyone, but young people who are eager to enjoy life are more vulnerable. Moreover, the use of credit cards has also become common among young investors. While credit cards can be valuable tools, their careless use can rapidly lead to debt. To avoid this, make timely payments, live within what you can afford, and develop a budget. By managing your money correctly, you may avoid financial stress and create a secure future.
- Budgeting: Gen Z believes in being cool on social media and living a fancy lifestyle, but living a rockstar life without having rockstar money is quite tricky for the Gen Z world. A new trend called ‘soft saving’ is all about spending now and saving later. It can lead to serious money troubles. It's similar to trading the future for today's joy. This is why financial literacy is important to Gen Z. Making a budget to save for the future can help reduce financial stress and fulfil future financial needs.
- Start early: This is one of the key guidelines for building a strong financial foundation. The earlier you start investing, the more your money will grow. It's like planting a small tree. Over time, it becomes big and strong, and the same goes for investing. The power of compounding will help your money flourish over time. The longer you invest, the more wealth you can build.
- Invest through SIP in mutual funds: SIP (Systematic Investment Plan) means investing a small amount at regular intervals. Due to the power of compounding, small investments can turn into much more significant sums over time. One can start with an amount as small as Rs 500 and watch their investment bloom over time.
If you invested Rs 1,000 every month for 25 years, then the estimated investment value today would be Rs 18,84,799*. The best part is that you invested Rs 3,00,000, and the return is more than six times the amount you invested. You can use the NJ Wealth SIP calculator to estimate the value of investments. *Assuming investment in Equity Fund and an average return of 12.64% p.a. as per AMFI Best Practices. Guidelines Circular No. 135/BP/109/2023-24 dated November 01, 2023. Past performance may or may not be sustained in the future, and there is no guarantee of future returns.
- Emotional biases: When investing, it is sometimes possible that investors fall into the trap of their emotional biases like fear, greed, anxiety, hope, etc. Moreover, young investors are often susceptible to investing due to herd mentality or the fear of missing out (FOMO). Decisions based on such emotions can lead to losses or missed opportunities. In investing, it is important to stick to a long-term investment strategy to fulfil your financial needs. Remember, smart investing is about following a consistent approach, not following the herd.
- Emergency fund: Build a solid emergency fund to help with unexpected bumps in life. Traditional savings accounts are a fine start, but mutual funds can provide an additional boost. Liquid mutual funds have the potential to generate higher returns than a savings account. Combining these strategies helps you to invest in your financial future and secure your wealth for those rainy days.
- Tax Planning: Embarking on your professional journey is an exciting milestone, but it's important to be mindful of how taxes can impact your hard-earned income. Certain types of mutual funds, such as ELSS, can help your money grow and save tax. They can help you maximise your wealth and save taxes.
Conclusion:
A smart financial journey starts at a young age. The biggest asset that young investors have is time. By starting an SIP in mutual funds early, setting a target, and prudent financial planning, young investors can solidify their financial well-being. To invest in mutual funds, investors can seek the guidance of a mutual fund distributor. A mutual fund distributor can help you reach your financial destination. They can handhold you throughout the investment journey, helping you avoid emotional biases. To take control of your financial future, start your mutual fund investment journey with the guidance of a mutual fund distributor today!