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Home >Opinion >Views >Four money rules for gen Z to build a coming-of-age investment portfolio

The nephew has just begun to earn. The euphoria of the first salary. The joy of living at home and seeing almost the entire money sit warmly in the bank account. Checking every five minutes to see that indeed the balance reads what it did five minutes ago. But he is Gen Z and is eager to do more with his money than his elders were at his age. He’s seen his aunt all over social media. He’s seen her book at airports. He’s heard some good stuff about making your money work for you. So, he comes calling for advice. People in the financial advisory sector will understand what a moment this is—your own extended family is the absolute last to take you seriously! Evidence of this is in the investments he’s already made, starting SIPs three months ago in a few funds, taking advice from somebody he was referred to.

These are good funds, but there are already two problems. One, the funds don’t have a story to tell. They are just good funds that some well-wisher put him into, they are not aimed at solving any of his concerns. Two, he is using a platform that only gives the option of a regular plan. Nephew is getting his advice for free and is then paying the platform trail commissions for the rest of his life on a growing portfolio for simply being the shop front that vends.

It is early days, we can easily rework the errors. The first lesson to Gen Z is this: your choice of financial products must work towards your identified goals. These may not be concrete goals—buying a bike, going for a holiday—most people are not thinking about such goals at the start. They just want their money to do more for them. Goals that he articulated and I facilitated were: liquidity, safety and growth.

Second, we over-estimated what he would spend in a month, just so that he does not have a shortfall in the first few months. For a prudent young adult like him, overspending is not an issue, hence the longer rope. Had it been another kid, I’d have given a very different option! He articulated his needs clearly—I want to have money to spend and I don’t want to fall short. If in a few months I find I have money left over, I will move it to my investments. He has kept a full 40% for spending.

Third, we built an emergency fund. He said he wants to have access to money quickly in case he needs it in the next one year. We put away 20% of the money now available for savings into a short-term debt fund that comes with a good credit rating, has good liquidity and is known for not messing with the investment mandate. Fourth, we built the long-term portfolio with 40% going into that pot. This was the conversation that took the longest time. He still had concerns of safety of money but was convinced about the long-term viability of equity as a way to grow your money. We split this long-term money with 20% into Public Provident Fund (PPF) and 80% into two higher-risk equity funds—one focused and one small-cap. A safer ride would have been to put him into a broad market index fund, but since he promises to update with me once a year (that way I get to see him for sure), we can build the risker fund portfolio that we have.

All the plans are direct growth. This means that he is not going to be paying a trail commission to a platform for doing no work. He is in the process of opening a Mutual Fund Utility account. And growth means that there is no regular “dividend" from his investments.

Gen Zers who are just about emerging out of parental care into self-sufficient young adults must decide what their story is before they set out to begin investing. If you have quick fingers that tap-tap-tap the screen into buying stuff before the brain can say no, you need a much tighter leash of less available cash to spend. If you are already prudent, then you can decide your own spending ratios. Next, figure out how much money you can put away without needing it for a long, long time. Imagine that your salary is that much less. That is the amount you put away for the long term—seven to 10 years for equity funds and 15 years for PPF. If you have access to good advice, you can do managed funds. If you don’t, a broad market index fund, with very low costs and low tracking error is great. The rest is your allocation to your short-term liquidity needs as they arise—think of it as an emergency fund. We’re just practising a full self-sufficient adult financial life by doing this. We’re just building the money habit. Your cohort will probably live to a 100 on an average—so good time to ensuring there is more money than life left towards the end.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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