One of the down sides of turning 18 that's not always obvious is that you get an extended period of time to let your money grow. Investment planning for 18 year olds in India is not a single product decision, but a decision that takes into account wealth building, learning through doing, safety and future goals.
Now the most important resource is not money, it's time. Small consistent investments can add up over a number of years. Here, we take a look at the best investment plan for 18 year olds, including index funds, stocks, PPF, emergency funds, and more, based on what each investment type is designed to accomplish.
Best Investment Plan for 18 Year Old in India
Let's take a look at the investment plan for an 18 year old Indian student and categorize it based on the purpose of investing, instead of only returns.
1. Wealth Creation
1.Index Funds
Index Funds are a type of funds that are based on a particular Index, such as the Nifty 50 or Sensex which provide for low cost and passive exposure to the market.
Strengths
Low expenses relative to actively-managed funds.
A clear and simple approach is easy to grasp as an initial investment.
There's no need for stock-picking or market timing.
Risks
No insurance or protection against market drops.
This means that there are no guarantees of outperforming the index, and only what it delivers can be expected.
Best For
A 18 year old who is looking for easy, low-risk equity investing with no expertise in the market.
Expected Returns
In the long term, broad in the range of 10-12 per cent a year, depending on the market.
They are a type of mutual fund that collects money invested by a number of investors and allocates it to a portfolio of stocks, in which the fund manager is a professional. Strengths Professional management and diversification. Easy access from any point, even with a small amount, by using a SIP. A long time learning curve, compatible with a young investor's planning timeframe. Risks Fluctuations in the market can result in short term losses. The performance of the funds determines the amount of return that is available. Best For Beginners who are not interested in individual stocks. Direct investment to individual stocks where the investors purchase shares of particular firms that are traded in the exchange markets such as BSE or NSE. Strengths Higher return potential compared to pooled investment options. Direct control and ownership of investments. Opportunity to learn firsthand about markets and companies. Risks Stock specific risk associated with the performance of a particular firm. Needs to research and can be emotionally difficult when dealing with down times. Best For An 18 year old who is willing to take the time to learn about companies and markets before investing. Expected Returns This can range widely depending on the stock and market conditions, and has no set range. Exchange Traded Funds (ETFs) trade on stock exchanges like regular shares, but they track an index, a sector or a commodity. Strengths Trades carried out during the trading hours with ease. Constructed in diversification on the following index or the sector. Risks Invests only by opening a demat and trading account. Due to the tracking error, slight differences from the underlying index may occur. Best For Young investors who are looking for flexible and low cost diversification through a trading account. Expected Returns The average is about 10-12 percent per year depending on the index being followed. Apart from the fact that Direct Stocks is a great way to build wealth, choosing a few specific stocks is a great way to teach yourself how markets really operate if you are an 18 year old. Strengths Students learn about company fundamentals and market behaviour. Develops Research skills and Analytical ability at an early age. The amount of small quantities is enough to begin learning. Risks Have the Potential for Losses When Research is Limited or Emotional. Continues to require time and attention to monitor holdings. Best For Young investors who have a more interest in learning the process rather than immediate returns. Expected Returns High, as results are directly related to stock selection. They are designed to reflect exposure to the international markets (such as the US or other index) via a single fund that is traded locally. Strengths Access to international firms and industries that are not present in the country. Easy to approach the understanding of international markets relatively. Risks Currency Fluctuations can impact returns. International exposure regulatory and taxation aspects can be more complicated. Best For An 18 year old who is curious about the markets around the world and wants geographic diversification. Expected Returns There's no fixed range, it varies depending on the index and the movement of the currency. An emergency fund is not an investment per se, but a cushion of cash that is readily available to cover an unexpected need. Strengths Offers financial safety and security and peace of mind. Accessible and readily available in liquid form when necessary. Avoids loss of face value of other investments in emergency situations. Risks The risk score range is not very significant when compared with other options. In a typical savings account, an idle sum of money can be eroded over time by inflation. Best For All young investors, even when they participate in any other investments, as a stepping stone first investment. Expected Returns Average returns are 2.5-4 percent a year when stored in a savings account. Liquid Funds invest in short term money market instruments that provide a higher rate of return than a savings account and liquidity near savings account level. Strengths Higher has a better rate of return than a standard savings account. Very ‘liquidable', typically available within '1 business day' of the date of purchase. Higher in terms of volatility than equity investments. Risks Returns are never certain and are prone to vary marginally. Not insured by the FDIC with a bank account. Best for Ideal for an 18-year-old who wants more yield on his emergency or short-term savings but does not want to tie up money for the long-term. Expected Returns Average returns are in the range of 6%-7% per year. Public Provident Fund is a government backed long term investment scheme with a tenureship of 15 years with tax free interest and maturity. Strengths Government backed - almost risk free. Tax benefits as per sect 80C, Interest received as tax free and Maturity proceeds as tax free. Seeds the habit of saving regularly and over a long period of time, from an early age. Risks High risks over a period of 15 years, some partial withdrawal options. Interest rates are not set at a fixed rate for the loan's entire term, but are updated on a regular basis. Best For An 18 year old with long term plans (higher education abroad or for retirement), and decades of runway to plan for. Expected Returns Now set between 7 and 7.5 percent per year and adjusted quarterly by the Government. The idea of starting a Long Term SIP portfolio (or SIP in Equity funds / Indexed funds) at age 18 is to give themselves several years to compound and get the benefit from them. Strengths A long time horizon allows for compounding to be beneficial. Market volatility is dampened over time due to Rupee cost averaging. Devises a good investment system early on and sticks to it. Risks Needs to be patient and disciplined over an extremely long duration. Without a long-term perspective, short term market declines can give cause for discouragement. Best for Ideal for an 18 year old with long term objectives such as home ownership and wealth creation. Expected Returns Long-term expected returns are broadly 10-12 percent per year, depending on the market conditions. First, build an emergency fund because having access to safety funds is more important early on than returns! Make use of time because the biggest advantage that you can have as an 18 year old is your decades of compounding in equity linked options. Don't invest too large of an amount or too different volume; it is more important to build the habit than the actual amount invested. Knowledge can be gained with balance, with direct stocks and international ETFs; but not the whole portfolio at this stage. Keep the long term goals distinct; if the long term goals involve education or buying a house, there are possible investment choices such as PPF or long term SIPs that may be better suited for this. For those who are 18, it would be wrong to say that there is one best investment strategy because it relies on the individual's needs for immediate safety, interest in learning through direct investment in the market, and long-term goals. This typically involves maintaining an emergency fund for safety, investing some money in index funds or equity mutual funds to build wealth, and then using other vehicles such as PPF or long-term SIPs for long-term goals further down the road. The actual power of 18 isn't about the size of the investments, it's the length of time they can be invested even low, steady investments can grow exponentially over the course of several decades. It's not just about having a big list of investment plans for 18 year old options, it's more about starting early, regardless of the size of the list.2.Equity Mutual Funds
3.Stocks
4.ETFs
2. Learning & Experience
1.Direct Stocks
2.International ETFs
3. Safety
1.Emergency Fund
2.Liquid Funds
4. Future Goals
1.PPF
2.Long-Term SIPs
Comparison Table: Investment Plan for 18 Year Old
Factors To Consider Before Choosing An Investment Plan
Conclusion