For a while now, we have been addressing the needs and concerns of individuals approaching retirement. Not surprisingly, we received queries from young professionals — who have just started their career.

They ask how they should manage their investments during the initial years of their career.

Early-career investments The most important decision at the start of your career is to save. Now, this is not an easy task as the urge to spend is typical.

You should, therefore, set up an automatic savings plan.

Give a debit instruction to your bank to transfer 15-20 per cent of your monthly income from your salary account to another bank account designated for investments. The auto-debit creates a compulsory savings habit.

Try to increase your savings each year till you achieve 30-35 per cent savings rate.

Next, your objective should be to identify three investment avenues. The first consists of systematic investments in equity mutual funds. The second should be recurring deposit in a bank. The last should be to accumulate lumpsum money to invest in tax-free bonds. Your investments in mutual funds should preferably be in the Nifty Index fund.

Alternatively, you could take the help of an investment adviser to choose an active fund. Bear in mind that disciplined savings and investment is more important than chasing returns.

You should protect your bond investments from taxes. That is why you should accumulate a lumpsum in your bank account to buy tax-free bonds.

Then there is the issue concerning the funding of assets. When you are at the start of your career, you may not have enough money to buy lumpy assets such as real estate. The question is: Should you borrow money to buy such assets?

Borrowings All of us have two assets — investments and human capital. The latter is the present value of future income. Your investment capital is small during your early career. But you have a long career ahead. So the value today (present value) of your future income — your human capital — is large.

House purchase Now, consider real estate. Suppose you buy a house when you are 28. Assume you make a 20 per cent down payment and borrow the rest to buy the property. Your home loan, including interest, will be paid through monthly instalments using your future income.

So, you have essentially converted some of your human capital into investments. You should carefully weigh this decision. Why?

For one, real estate is lumpy. So, you will spend nearly 60 per cent of your working life using about 40 per cent of your monthly income to repay your home loan. And in the process, you will create a single asset — your house! Will you venture to make such concentrated investment in fixed deposits or stocks?

For another, you are too early in your career to know whether you will continue living in the city or move elsewhere because of better employment opportunities. So, would buying a house in a city where you currently work be meaningful?

Bear in mind that the rental income you earn on your house will not be enough to pay your loan. Then there is maintenance cost.

Get your focus right The choices you face in your early career can be categorised typically into two — investment choices and funding choices.

You should set up systematic investment plans to develop savings discipline and accumulate wealth.

Your decision to monetise your human capital should depend on the stability of your income, not just on the amount you earn.

Bear in mind that you should pursue multiple investment objectives and not focus only on buying a house!

(The writer is the founder of Navera Consulting. Feedback may be sent to >portfolioideas@thehindu.co.in)

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