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First off, I would like to congratulate you for having the long-sightedness to think about investing your spare amount from college for your future, instead of spending it on parties and outings. A vast majority of the population underestimate the value of every year not spent investing, with a more sizable majority not even aware of the benefits of investing at all.
The advantages of starting your investments, no matter how small, at a younger age include:
- Experience of having already dabbled in investment vehicles before you are out in the world.
- Teaching yourself to think long-term for any activity you take up.
- Learning to live relatively frugally so that you can have more money put aside for your investments
- Having already taken the massive initiative of starting to invest.
- Educating yourself on various aspects of personal and corporate finance in the process of investing.
Ensure that before you begin your journey, you possess all the necessary documents like your major PAN card, your Aadhar card, and bank savings account in your name and your control (this will be crucial to provide a bank statement if you are keen to play around with derivatives like futures and options). The next step of opening a Demat account with your broker will require these documents, including a canceled cheque of your account number, your signature, and a passport size photo of your face.
Here are a few sources of investment you can consider:
1) Index ETFs or Index Funds:- We have spoken over the main differences between index funds and index ETFs earlier, but having either of them can be an extremely useful investment vehicle in your arsenal. You benefit from having a diversified portfolio of the best companies in the country, making as much return as the market does over a long time frame.
If you do not have enough capital to make a sizeable investment, follow the strategy of SIPs - Systematic Investment Plans. For example - a single share of Nifty BeEs might cost around 160 rupees on the market right now. If you can spend 500 rupees per month on buying 3 shares of Nifty BeEs per month for a long time duration with discipline, you will be able to amass a huge position eventually while not having to wait to accumulate this capital. Also, note that you can always increase or decrease the amount you invest per month depending on your financial situation in the future. What really matters is starting NOW.
Warren Buffett, for example, praising the concepts of ETFs and index funds, said that his $200 investment in an ETF in 1942 would have returned $442,000 over his entire lifetime. Imagine what you can accomplish with just some more money, time, and an index ETF!
2) Mutual funds:- Like we had previous discussed in "Nine factors to differentiate between mutual funds and portfolio management services", people unable to invest in the stock market directly because of either lack of confidence, lack of risk capacity, or lack of knowledge altogether can approach mutual funds to provide them with a set of stocks picked and selected by skilled professionals to provide you with a return that is likely to beat the overall market.
If you would like to take some more risk considering you have time on your side and are free of major responsibilities, you can pick mutual funds that typically choose small-cap and mid-cap funds to invest in. Another alternative is to choose mutual funds that invest in particular sectors only or some other characteristics that can maximize potential returns.
However, for many reasons, mutual funds on average tend to underperform the market for various reasons. More often than not, it may be in your best interests to do your due diligence in stock picking.
3) Individual stocks:- Adding to the previous point, it is highly recommended to take out the time and effort to intensely research stocks to put your money in and watch yourself. If you are risk-averse and want to be careful with your money, you can invest in large-cap 'safe' stocks listed on national exchanges like Sensex or Nifty.
However, you are still young and this is the best time to take a massive out of risk from your small capital. Look to invest in small-cap and medium-cap stocks - companies that are not very huge but have tremendous growth potential. These stocks turn out to be "multi-baggers" as these are much likelier to make you an unbelievable fortune over your lifetime, maybe even inside the next decade or so. However, these tend to be riskier stocks, so ensure that you conduct your due diligence very carefully and earnestly, and hold the stock during the ups and downs so you can ride the entire growth of the stock.
In a broader article titled, "investing in your twenties", we covered various aspects of investing that will benefit you in your late twenties, but starting in college or before college will give you a headstart concerning delicate investing aspects like heartaches during downturns and recessions, euphoria during rallies and the patience to keep hold of the stock, etc.