If you are reading this, you are probably in your early twenties. You may have recently started working or you may be still in college and the only income you get is the money from your internships or side gigs. Either way, you have new money in your hands and you have hopefully not spent it yet on beer or parties or a trip to your nearby beach city. So, if you have money in your hands which you do not need to use, the best choice would be to invest it.
Now you may be wondering why you should invest so early. After all, investing is something old people do for their retirement, right? And at such an early age, retirement seems so far away it looks like another lifetime. Why bother saving for something so far away? Besides, how are you going to enjoy with that money when you have no teeth in your mouth and no strength in your knees? Beer or a cool beach party NOW looks much better than a large retirement corpus so far away, right?
But let me burst your bubble. Investing is not for old people and it definitely isn’t only to save for retirement. Actually, investing isn’t really a choice. You must do it if you wish to save your ass. Read this article before you proceed to know exactly why.
Hopefully, you now realize that you are already losing if you don’t start investing right away. And the earlier you start, the better it is for you since you get the power of compounding. As is often said, “Time in the market is more important than timing the market".
So you have time and you also have money. The best combination ever!!!
But investing can sound overwhelming if you are just starting. Out of the thousands of options like stocks, bonds, mutual funds, debt funds, CDs, provident funds, etc., which one should you choose? What if you put your money into one of the bad companies and you lose it all? Neither the present you nor nor your future you will be able to party then.
Investing is an important activity, one you must not do without sufficient knowledge. But how do you invest right away when you don’t have any knowledge about investing whatsoever? Doesn’t that sound impossible to do?
Not really. Let me explain how you can do it.
Index funds:
But what are index funds?
Index funds are a kind of mutual fund, but instead of letting the mutual fund house decide what stocks to buy, the index funds follows a benchmark index. There are various indices that track different segments of the market. For example, if you look at NIFTY, there are various indices like NIFTY 50 which is basically the top 50 companies in NIFTY by market capitalization, NIFTY NEXT 50 which tracks the next 50 companies by market cap, NIFTY MIDCAP 100, NIFTY SMALLCAP 100 and so on. Each index tracks a set of companies in an exchange based on their market cap, and each company in an index has a certain weightage, say one company might represent 3% in the index, and another might be 2% of the index.
What an index fund essentially does is invest your money in all the companies of the index. So if you invest in a NIFTY 50 index fund, your money will be used to buy shares of the 50 companies in the index. Not only are the companies the same but even the weightage is kept almost similar to the actual index. So if a company has weightage of 4% in an index, 4% of your money goes into buying shares of that company.
Because an index fund represents an index and its composition, it also gives the same returns as the index. Also, since the fund house does not have to “actively” manage your fund (it blindly puts in your money in the companies which are in the index at the time), this fund is known as a passive fund.
But why should you choose index funds?
1. You don’t have to worry about choosing anything on your own:
Because index funds are passive, there is hardly any decision you need to make. You get rid of individual stock picking (which requires tons of knowledge, either fundamental or technical), but you also save yourself the trouble of choosing between mutual funds. Even though mutual fund are much lesser in number than actual stocks, there are still many mutual funds. Too many, I might say. You don’t have to spend your time choosing between hundreds of mutual funds of different sectors, market caps, and fund houses which helps you invest literally tomorrow. That is not to say that you shouldn’t choose active mutual funds - you should (here’s why) but take your time. Don’t invest in any fund blindly. Study and analyze before you dive in. But let your money grow on the side with index funds while you make that decision
2. Diversification is easy:
Since all your money gets divided and alloted as per the benchmark index, you get automatic diversification across various sectors. For eg. In Nifty 50, 37.4% weightage is to financial services, 14.7% to IT, 12.3% to energy sector, 9.35% to consumer goods, and rest divided in automobiles and healthcare. So if you invest in this index fund, you automatically get the same diversification. So you don't have to worry about exposure to various sectors.
3. You can easily choose your benchmark:
As I mentioned before, there are various indices for any stock market. You can choose between various indices and put your money into different sections of the market, say large cap, midcap and small cap. This also gives you the ability to ride indices which you think can grow at a faster rate than the major index of the stock market. If for example, based on your analysis, you realize that the small cap companies can grow at a much faster rate than the big "bluechip" companies, you can put your money in an index of small caps, say NIFTY small cap and get advantage of that growth.
4. They are cheap:
Since the mutual fund houses do not actually have to analyze, choose or churn stocks by any analysis, they do not charge much for an index fund like they do for active mutual funds. Thus expense ratio (which is the percentage of your amount that the fund house charges) of index funds is very low.
5. They save you time:
There isn't a bigger benefit to index funds than the time you save especially when you have just started investing. Beginners are generally too eager to get big returns very quickly and either end up putting their money in highly risky and unsustainable bets solely on tips from their friends or "financial influencers" or they end up buying everything under the sun and get overdiversified. They spend hundreds of hours headlessly studying whatever financial influencers recommend and get very little returns as reward. It is therefore much better to park your money in index funds while you actually study investing/trading and get better grip of the stock market.
Bottom Line:
Twenties may be the best time to start investing since you are able to give your investments a lot of time, which is the key to your investing journey. If you are only starting, it would be wise to choose index funds as you learn about investing on the side. Remember, nothing is as important as starting early.
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