A guide to investing after landing your first job

How should you invest after you start working?

Are you are graduating this academic year and ready to start working soon? If so, you have to plan on how to invest your savings.

Contingency first

Most of you may start your career with a large student loan. Should you use your monthly savings to prepay the loan? This is not a decision that you should take by just comparing the interest rate on your loan and the returns on your intended investment. If you are uncomfortable carrying a loan in your personal balance sheet, you should gradually prepay the loan.

You should first create a contingency fund to help you meet any unexpected short-term liquidity requirements due to a medical emergency or loss of income. It is optimal to set up this fund by creating a corpus that is thrice your average monthly expense. This corpus will have to be adjusted to your changing lifestyle as you progress in your career.

The important principle for a contingency fund is that the investment must be highly liquid and have no risk of nominal capital loss — you should be able to quickly move your investment into cash without loss of capital.

Suppose you decide to keep the your contingency fund in a sweep account, an FD account attached to a savings account. After you deposit the minimum amount in your savings account, you should set up an auto-debit to transfer money from your salary account to this sweep account. Will you have surplus amount even as you contribute to your contingency fund? If so, you should create an investment account, carrying both equity and bond investments. It does not matter if you do not have a life goal for which you need to save. You should simply set up an RD in a bank that offers you a handsome interest, for five years and above. For your equity investment, start a systematic investment (SIP) in a large-cap index fund. Alternatively, you can set up an SIP in an active fund if you are confident of picking one.

Importantly, you should increase your SIP amount every year. You can do this by setting up a forward SIP such that you start the investment in the month you receive a salary increase. For instance, if you typically save 10 per cent of your monthly income, you should save 15 per cent of your expected salary increase.

Investment portability

It is just as important that you do not invest in some assets early in your career that may not bode well for you till later in life. Two such investments are real estate and gold — both are physical assets and can be used as collateral to meet short-term liquidity. But both these factors pale in comparison to the ease of portability that financial assets have.

Consider this. You may shift from one city to another in search of a better career. You should, therefore, have an investment portfolio that can be easily transported to all these places. Carrying real estate and gold can be cumbersome. The principle is simple: The more portable your job is, the more portability you should build into your investment account. This means you should have financial assets such as equity and bonds and, perhaps, a small exposure to physical gold.

The writer is founder of

Navera Consulting.

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