Investing 101 For Gen Z: The Guide To Smart Financial Moves

For Generation Z (born 1997 through 2012), starting on the right track of investment early is more than just making wealth; it involves securing one's future financial stability amid challenges in the economy. With thousands of investment opportunities, it is not surprising why individuals often end up feeling lost and confused. However, making smart decisions with respect to financial goals, having the ability to tolerate risks, and knowing about the right tools for investment can aid in building robust financial foundations. Here's a closer look at how Gen Z can take the first step towards investing and some specific strategies which they might find of particular use:

Why Start Investing Early?

If you start investing at a young age you can allow your money more time to accrue compound interest and get better returns on your investment. The longer your money is invested for the better the returns will be. As a result, starting young in this journey is likely to build wealth over time. For instance, if you invest Rs 5,000 per month in an equity mutual fund with an interest rate of 12 per cent per year, in 10 years, you could have over Rs 11,00,000, with a large portion of it being from compound returns accrued over a long duration of time.

Define Your Financial Goals

Before choosing an asset class from the pool of investment options, it is important to take the time to define clear and measurable financial goals. This can be done by asking yourself questions like: What is my savings goal? And prioritising your financial goals between short-term and long-term goals depending on how much time you have to achieve them. It is also important to assess your risk-taking capability and understand whether it's low, moderate or high.

This way, you can know which type of investment products are appropriate for you and, therefore, make better decisions. For instance, if you are saving for a down payment on a home in 5 years, then the investment choice would be different from saving for retirement 20 years down the road.

Educate Yourself About Investment Options

Knowing about the different types of investment options that are available in India before you invest your money is important. Let's look at some effective strategies that Gen Z’s can consider.

1. Stocks (Equities)

Investments in equities often offer the highest returns, however, the risk involved in such investments is high as well. Therefore, if a Gen Z investor wants to invest in individual stocks, then they can do so if they have the time and resources to understand how markets work.

2. Mutual Funds

Mutual funds pool money from various investors, which is then invested in diversified investments. Within the mutual fund category, SIPs have emerged as the darling for investors fresh to the market. It helps invest a fixed sum periodically, say every month or quarter, in a mutual fund to build wealth over time while managing volatility in the market.

Equity mutual funds are riskier with higher return possibilities, while debt mutual funds carry less risk and have a small return. The SIPs also have the benefit of rupee cost averaging, where you buy more units when the market is down and fewer units when the market is high thus reducing the impact of market fluctuations.

For example, if you are investing Rs 5,000 every month in an equity mutual fund through SIP, with an average annual return of 12 per cent, then after 5 years, your total investment of Rs 3 lakh will be approximately Rs 4.08 lakh. Long-term goals, such as building a house, are best suited for SIPs because it will make you disciplined. Those who desire professional management but cannot get their heads around stock picking will appreciate perfect product offerings from mutual funds, especially in SIPs.

3. Fixed Deposits (FDs)

Fixed deposits (FDs) are one of the safest options for conservative investors as fixed deposits offer guaranteed returns. However, the interest rates offered are relatively low compared to an investment made in stocks or mutual funds. You can keep your emergency fund or medium-term savings in the FDs. If you had invested Rs 1 lakh in an FD for a 5-year term at a per annum interest of 6 per cent, then you would be able to get approximately Rs 1.33 lakh at the end of that term.

4. Debt Market Instruments (Bonds or Debentures)

Bonds and debentures are fixed-income securities, that allowing you to lend money to governments or corporations in return for periodic interest payments. Generally, investments in bonds are safer than stocks and provide a steady flow of income. While bonds are issued by the government, debentures are primarily issued by companies. The main difference lies in the risk factor; government bonds are safer than corporate debentures, but the latter involves a little more risk and returns a better result. Instruments in the debt market are very good for conservative investors who require a low-risk predictable source of income, especially if you are targeting medium-term goals.

Diversification - Don't Put All Your Eggs in One Basket

The best way to minimise the risk in investments is through diversification. Do not put all your money into one single stock or one single fund. Instead, distribute your money across various investment assets be it stocks, mutual funds, SIPs, or bonds. This reduces the impact of market volatility on your total portfolio.

For instance, if you are dividing Rs 10,000 among SIP (Rs 4,000), stocks (Rs 3,000), and fixed deposits (Rs 3,000), you will balance the more risky options with more stable ones, ensuring regular returns while safeguarding your money.

Risk Tolerance and How to Assess It

One of the excellent aspects of investment is understanding the risk tolerance one has. Since you are a Gen Z investor, you have the benefit of time that can be used to your advantage to recoup any downturns in the market, and you can take greater risks. Still, you must know how much risk you can tolerate. In case you fear losing money in the stock market, you can invest in more low-risk investment products such as FDs or debt mutual funds.

Consistency Is Key: Invest Automatically

One of the ways to maintain consistency in investing is through automation. You can enable the ‘auto-deduction’ feature via your bank. Under auto-deduction, a set amount of money is deducted from your account every month and invested in the systematic investment plan you choose. This can prevent you from wasting your money and help you in developing the habit of investing it regularly.

Investing is one of the best ways to secure your financial future, and starting early is key. For Gen Z investors understanding your goals, diversifying your investments, and staying disciplined with a long-term approach will help you achieve financial independence. Remember, there's no "one-size-fits-all" strategy for investing, but with investment avenues like SIPs, stocks, and mutual funds, you can build a strong foundation and watch your wealth grow.