5 money lessons that Radhika Gupta of Edelweiss AMC would give to her younger self

You cannot witness the effect of compounding nor can you benefit from it unless you have time on your side. Time is the biggest factor both affecting and effecting the magic of compounding as money can grow from money only when you give it enough time to grow and compound. Irrespective of how banal it may sound, the truth remains that time stands as the most invaluable resource. Making investments during your twenties can profoundly influence your financial prosperity during the later stages of life.

Radhika Gupta, CEO, Edelweiss Asset Management Company, inher recent tweet, has shared five “money tips” for those who have just started earning. In a tweet, Gupta wrote, “5 pieces of money advice I would give my 22-year-old self (who just started earning)…”.

The following article details the pieces of advice by Gupta along with how investors must interpret the same if they want to reach their financial goals in time.

Advice 1: Start early but not just because of compounding. When you start your career, you are often so neck deep into work and proving yourself that hard-earned money can just sit in a bank account despite being a finance professional. I waited for 2 years of working to start. It was a bad idea.The wait then claws at you and when you start you make rushed decisions because you feel you missed out (I did).Starting early helps you ease into the process, test the waters, and make mistakes on small capital. Also, read and study your options well before you start. Young people often fall prey to the cocktail party and what my friend is investing in syndrome, and it usually ends up hurting badly.

Interpretation: Commencing investments in your 20s holds a multitude of reasons, and while compounding is just one facet, there are several additional factors to consider:

• Lesser financial commitments: During youth, major financial responsibilities like mortgages, car payments, and supporting a family are usually absent. This translates to having more funds available for investment purposes.
• Ample recovery time: Youth grants a lengthier span for recuperation from investment losses. Given the natural market fluctuations, maintaining patience and avoiding hasty selling during market downturns is crucial.
• Risk endeavours: The young age allows for a higher tolerance for risk in investments. This is due to the extended timeframe available to bounce back from any losses.
• Evolving investor skills: Commencing investments at an early stage offers an extended duration to learn and develop investment acumen. This time span facilitates acquiring knowledge about prudent investment choices.

It’s acknowledged that initiating investments at the onset of your career can be challenging. However, prioritising investment, even if it’s a modest monthly contribution, remains significant.

Advice 2: The rules, especially the age rule don’t work. Young people don’t have to be 100% or largely equity because they have time on their side. They can be but don’t have to be. Risk tolerance may just be different. Circumstances or liabilities may be. For instance, highly volatile careers (like mine then) may call for more conservative investments. I also do believe everyone needs some liquid contingency money in debt. What if you want to start a business from savings when markets are down? I did. Choose the asset allocation that works for you.I really believe the best one is the one that doesn’t let your money sleep during the day but doesn’t stress you enough to eat your sleep at night, in tough markets.

Interpretation: The age-based rule serves as a general guideline, yet it should not be solely relied upon to determine your asset allocation. Your specific situation and willingness to take risks must also be factored in.

For example, a young individual intending to launch a business or purchase a home in the near future might not find it wise to allocate their entire investment to stocks. They might lean towards a greater portion of bonds or other lower-risk assets. Conversely, a young person with no immediate substantial expenses and a high tolerance for risk could comfortably go all-in on stocks.

In essence, the most effective method to ascertain your asset allocation involves consulting a financial advisor. They can provide insights into your unique circumstances and risk tolerance.

Here are additional elements to ponder when determining your asset allocation:

• Time horizon: How long until you require access to your funds? A lengthier time horizon permits more investment risk-taking.
• Risk appetite: How comfortable are you with the potential loss of your investments’ value? Lower risk tolerance may incline you toward more cautious assets.
• Financial aims: What are you saving for? Retirement might prompt a higher stock allocation, while a house down payment could favour more bonds.
• Investment knowledge: How well-versed are you in investing? If you’re uncertain, collaborating with a financial advisor could be prudent.

Your asset allocation need not be static. It can be adjusted as your circumstances transform or your risk tolerance matures. By comprehending your distinct requirements and aspirations, you can devise an appropriate asset allocation.

Advice 3: Simple products do not take away from your intelligence quotient. I studied at one of the finest business schools in the world and started life trading one of the most sophisticated financial instruments - collateralised mortgages. After 17 years, I believe the best investment for me is a SIP into a balanced advantage fund and a mid/small cap fund. It gives me peace, meaningful returns to meet my goals and daily liquidity. Liquidity I believe is priceless. If someone wants you to lock in your money, you better be earning a serious premium and have a real reason for doing so. Many generations of evolution later many of us are still happily eating curd rice and dal chawal. The same is true of investing products.Simple hai to sahi hai.

Interpretation: Many investors find appeal in allocating their funds to balanced advantage funds and mid/small cap funds. These fund types offer a favourable blend of risk and potential returns, making them an attractive choice for individuals seeking sustained growth over the long run.

Balanced Advantage Funds (BAFs) employ a combination of stocks and bonds, effectively curbing volatility and shielding investments from sudden market downturns. On the other hand, mid/small-cap funds channel investments into companies of smaller stature compared to large-cap counterparts. Although these smaller companies tend to exhibit greater volatility, they also present the opportunity for heightened returns.

In the realm of investment selection, liquidity holds significant weight. The ability to access your funds without incurring hefty fees or penalties is crucial. Both balanced advantage funds and mid/small cap funds are characterised by their liquidity, enabling effortless and rapid selling.

In the broader context, initiating a Systematic Investment Plan (SIP) into balanced advantage and mid/small cap funds can serve as an effective strategy for fostering wealth accumulation over an extended period. However, it remains imperative to conduct thorough research and grasp the associated risks prior to committing your investments.

Advice 4: Have a framework and write it down. This really helps. Write down your principles. Your goals.What you would invest in and why.What you wouldn’t invest in and why.What is good and bad performance?How often will you review it?Think of money holistically. For instance, how will you think of real estate? What will be your approach around ESOPs and how much of your wealth they should be at max? Writing down principles gives you a guide to refer to when confused and helps you from second-guessing your decisions.

Interpretation: What are my financial goals? Let me first sit down to reassess my financial objectives.

• Retirement: My aim is to accumulate sufficient funds to retire comfortably by the age of 65.
• Emergency fund: I intend to amass enough savings to cover six months’ worth of living expenses to safeguard against unexpected job loss or financial crises.
• Down payment towards house: Within the next five years, I strive to accumulate the necessary funds for a down payment on a house.
• Child’s education: I am committed to saving enough money to finance my child’s college education.

Here are the investment avenues I am considering:

• Stocks: Stocks align with my preference for long-term growth. Although they might exhibit short-term volatility, their potential for substantial returns over an extended period is appealing.
• Bonds: I view bonds as a lower-risk alternative to stocks. While they provide a consistent income stream, their potential for high returns is comparatively lower.
• Real estate: Real estate presents an opportunity for diversification and a steady income flow through rent payments.
• Index funds: Index funds offer a cost-effective and diversified means of investing in the stock market without the need to select individual stocks, mitigating risk.

Here are the investments I will steer clear of:

• Individual stocks: The volatility and potential for swift value depreciation in individual stocks make them too risky for my taste.
• Cryptocurrencies: Given their volatility, lack of regulation, and high risk, cryptocurrencies do not align with my investment strategy.
• Ponzi schemes: I unequivocally avoid fraudulent investment schemes such as Ponzi schemes that promise unrealistically high returns with minimal risk.

To gauge investment performance, I will deem an investment successful if it meets or exceeds my expectations. Conversely, underperformance would refer to investments falling short of my anticipated outcomes. I plan to review my investments at least annually to ensure alignment with my goals.

I perceive real estate as a long-term investment avenue, offering the potential for income generation and wealth accumulation. However, I emphasise the importance of comprehensive research and risk comprehension before venturing into real estate.

Regarding Employee Stock Ownership Plans (ESOPs), I exercise prudence. While they can be valuable retirement tools, the potential risk stemming from a decline in the company’s stock price prompts a cautious approach. I intend to limit my ESOP exposure to a small fraction of my overall wealth.

Advice 5: Save, invest but also enjoy your money. Spend it on things you like, on little joys (like my first LV bag) and big joys (like my home). Investing is about fulfilling goals and living a better life, not a competition to win. I may be an MF CEO but finally, there is limited joy an NAV can give you. That comes from buying your parents a car, yourself your first watch, your child an amazing education, your first family holiday, or whatever else it is. A redemption when used to bring a smile to someone is a good one.

Interpretation: While saving and investing hold significance, deriving enjoyment from your money and using it to foster personal happiness is equally crucial. The toil of hard work and diligent saving becomes futile if you don’t relish the fruits of your labour.

It indeed makes sense to use money to bring joy to others. This altruistic approach is a splendid means of leveraging your finances to create a positive impact in the world.

The optimal approach, in my opinion, involves striking a balance between saving and spending, accomplished by defining specific financial objectives. What do you envision accomplishing with your funds? Is early retirement, homeownership, or funding your children’s education on your list? Once your goals are clear, formulating a strategy to attain them becomes feasible.

Maintaining a pragmatic perspective on spending is essential. Avoid stretching your lifestyle beyond your financial means. Ensuring you allocate sufficient funds each month toward your objectives is vital.

And, of course, cherishing your financial resources is paramount. Utilise them for endeavours that bring you happiness, whether that’s treating yourself to a new possession, embarking on a brief vacation, or contributing to a cause you hold dear.

Above all, the key lies in identifying a harmonious equilibrium tailored to your circumstances. There’s no universally correct approach to managing your finances. The vital aspect is to find contentment in the choices you make.