PERSONAL FINANCIAL AND INVESTMENT MANAGEMENT

FOR YOUNGSTERS
February 2025

INTRODUCTION

This paper serves as a reference for participants attending the discussion on the subject.

While I firmly believe that Personal Finance is more ‘Personal’ than it is ‘Finance’, this document
presents a general framework.

This note is written with a 20-something-year-old in mind. While it will provide immense value to
young professionals, even older individuals can use this as a guide to structure their finances—
especially if they haven't given investments much thought.

WHERE YOU ARE RIGHT NOW

As a 20-something, you've completed college, landed a job, and now, for the first time, you have
a sizable income along with expenses and—hopefully—a surplus.

With this comes a growing list of aspirations:

 Buying your first vehicle

 Going on vacations
 Funding for higher education
 Contributing to your wedding expenses
 Buying an apartment after a few years of work

Beyond this, you may also have goals like:

 Accumulating capital to start a business or practice

 Financially supporting your parents or younger siblings
 Taking a sabbatical to explore new opportunities

But there’s one thing common in all these aspirations—they all require money.

The Bigger Goal: Financial Freedom

While achieving these milestones is important, there's one goal that you should never lose sight
of: Financial Freedom.

What is Financial Freedom?

Financial freedom means working because you want to, not because you have to. It is best to
achieve this state by choice rather than being forced to retire due to age, health issues, or
redundancy.

1|Page
What Does Financial Freedom Look Like?

1. Know your annual expenses. (Example: ₹6 lakhs per year / ₹50,000 per month)
2. Health insurance coverage for self, spouse and children (minimum ₹10 lakhs in a tier-2
city).
3. Emergency Fund: At least one year's worth of expenses.
4. No outstanding loans.
5. Children should be financially independent or have funds set aside for them.
6. Owning a house/apartment.
7. Asset Base (Should exclude funds set aside 3-5):
o 25 x annual expenses – Satisfactory (withdrawal rate: 4%)
o 33 x annual expenses – Good (withdrawal rate: 3%)
o 50 x annual expenses – Excellent (withdrawal rate: 2%)

The lower the withdrawal rate, the better the ability to withstand prolonged bear markets and
unexpected large expenses.

HOW TO ACHIEVE FINANCIAL FREEDOM?

Unless there is a windfall (large inheritance, startup exit, lottery win) most will need to achieve
financial freedom through two key ways:

Savings Rate: In India, a 25% savings rate is satisfactory, 50% is excellent, and anything in
between is good.

Early in your career, your income may be lower, but prioritizing savings is crucial. By consistently
setting aside a portion of your earnings, you’re casting a vote for the type of person who is a
‘disciplined saver’. This habit of saving and investing builds financial discipline that will serve you
well when your income grows.

If income is low and aspirations are high, a higher savings rate alone may not suffice. Increasing
income becomes crucial which can be done through:

 Upskilling and certifications

 Higher education that adds value
 Freelancing

The Savings Equation Shift: Most people approach savings using this equation:

Income - Expenses = Savings

The problem? Savings become an afterthought—whatever is left over after spending. Instead,
financial freedom requires flipping the equation:

Income - Savings = Expenses

By prioritizing savings first, you pay your futureself before anyone else. The best way to enforce
this habit? Automate it. Set up investment dates right after your salary gets credited, ensuring
that savings happen before discretionary spending kicks in.

2|Page
This small shift may seem subtle, but as Law#8 of Systems Thinking states:

“Small changes can produce big results, but the areas of the highest leverage are often the least
obvious.”

OBJECTIVE-ORIENTED PLANNING: A Structured Approach

A sound financial plan is built on risk protection and wealth creation:

Risk Protection

1. Emergency Fund – Build a safety net with at least one year of living expenses.
2. Health Insurance – Even if you have employer-provided coverage, an individual policy for
yourself, spouse, and dependents is essential.
3. Term Life Insurance – A pure term life cover ensures financial security for dependents in
the event of the breadwinner’s untimely demise.

Wealth Creation

Specific Investment Fund: If you have a clear goal in mind—be it higher education, a wedding,
a sabbatical or a business venture—earmark savings for it separately.

General Investment Fund: While some expenses are well-defined, life often throws
unexpected financial decisions our way. A General Investment Fund acts as a buffer to
accommodate both foreseen and unforeseen expenditures.

Example: During an annual review, a family prioritizes: Children’s education and repayment of
the principal portion of a housing loan. However, by mid-year, they decide to upgrade their car,
requiring a ₹6.5 lakh net cash outflow. This expense is comfortably covered by the General
Investment Fund.

Financial Freedom Fund: The ultimate goal: building a long-term corpus worth 25-50 times
your annual living expenses. This is your bridge to financial independence. Contributions from
EPF, NPS, inheritances, and long-term investments can bolster this fund, but disciplined savings
remain its cornerstone.

Thumb Rule for Surplus Allocation

 25% – Emergency Fund (until fully built)

 50% – Specific & General Investment Fund
 25% – Financial Freedom Fund

This is only a guideline—adjust allocations based on individual circumstances and financial goals.

3|Page
INVESTMENT TOOLS

A well-structured portfolio requires a mix of asset classes that align with risk tolerance, financial
goals, and tax efficiency. Here are three key investment tools:

Debt Mutual Funds (Liquid, Money Market, Ultra-Short Term Funds): Invests in short-
duration, high-credit-rated government and corporate bonds, certificate of Deposits. Focused on
capital preservation and stability, with durations of less than 12 months which minimizes interest
rate risk.

Use Case: Ideal for emergency funds, short-term parking of surplus cash, and stable portion of
the Specific or General investment fund.

Diversified Equity Index Mutual Funds: Provides exposure to broad market indices at a low
cost. Examples: Nifty 50, Nifty Next 50, Nifty Midcap 150, Equal Weighted Nifty 100, Large &
Midcap 250.

Use Case: Forms the Growth component of the Specific Investment Fund, General Investment
Fund, and Financial Freedom Fund.

Equity Savings Funds: Typically allocate 15-40% in equity, with the remaining portion in bonds
and arbitrage positions. This structure provides a higher degree of safety while maintaining tax
efficiency.

Use Case: A close substitute to short-term debt funds for investors in the higher tax brackets
seeking tax-efficient returns. This fund can be used to provide stability to the Specific and General
Investment Fund.

RISK MANAGEMENT:

Risk is ever-present in investing, but the key lies in effective risk management. There are two
types of risks:

 Risks that cannot be managed – should be shunned!

 Risks that can be managed – often translates into reward.

Risk Management Tools

 Diversification: Spread investments within and across asset classes to minimize

concentration risk.
 Adhere to the Time Horizon: Equity investments require 7-10+ year horizon to ride out
volatility.
 Systematic Investing: Investing through Systematic Investment Plans (SIP) and Transfer
Plans (STP) help reduce the systemic risk. In other words, it is diversification across time.
The only exception? If there is a clear ‘margin of safety’ lump-sum investments may be
considered.
 Periodic Review & Rebalancing: Financial markets fluctuate—so periodically your asset
allocation can be rebalanced to the desired ratio. Regular reviews ensure your
investments stay aligned with your financial goals.

4|Page
IMPLEMENTATION: Where The Rubber Meets the Road

Financial planning spans multiple domains—mutual fund investments, insurance, taxation, and
estate planning. Investors can either take a Do-It-Yourself (DIY) approach or seek professional
guidance based on their expertise and confidence in managing finances.

The DIY Approach: If you clearly understand your financial needs and can implement strategies
effectively, managing your finances can be a viable option.

Consulting Professionals: For those who prefer handholding and guidance, here are the
professionals for each domain:

 Investments → Mutual Fund Distributors (MFDs)

 Insurance → Insurance Agents
 Taxation → Chartered Accountants (CAs)
 Estate Planning → Advocates (for drafting wills)

How to Identify the Right Professionals?

Beware of Hard Sellers: Some MFDs and insurance agents including bankers who distribute
financial products, push products that may not be in your best interest.

A good professional will spend the first few meetings understanding your financial goals and
recommend solutions only after assessing your needs.

You should feel at ease discussing your financial concerns without hesitation or fear. If you
struggle to express your needs, the professional should make an effort to clarify and guide you.
Ultimately, you should feel heard and confident that the advice aligns with your financial goals.

HOUSEKEEPING: Keeping Your Financial Plan in Check

A well-structured financial plan is not static—it evolves with changing circumstances. While your
investment plans are created based on your current priorities, they should remain flexible and
open to adjustments as life progresses.

Regular Reviews: Your financial goals are not set in stone—they should be reviewed periodically
and adjusted based on new developments in life. You can be fully committed to a goal while
staying open to changing it when necessary. A financial plan is only as good as the information
available at the time—as new insights emerge; your plan should evolve accordingly.

Other Objectives

 Ensure that all bank accounts and investments are either jointly held or have nominations
registered to avoid future complications.
 Keep your spouse and family informed about your investments, insurance policies,
retirement benefits, and tax matters.

5|Page
  Ensure that all adult family members apply for and obtain an income-tax PAN card, an
election identity card, a passport, a driving licence and an Aadhaar card. Every individual
must also have an active bank account, preferably with a debit card and Internet banking
facilities enabled.
 Know your client (KYC) registration formalities for mutual fund investments may be
undertaken and completed.

UNDERSTANDING THE MATH OF INVESTING

When it comes to investment returns, numbers don’t lie, but they can mislead. Percentages,
averages, and compound growth rates often appear straightforward, yet they can paint a
deceptive picture.

Fooled by Percentages: Why Context Matters

"39%!" your colleague exclaims, thrilled by their equity mutual fund's one-year return.

You check your portfolio. 12%.

"Am I doing something wrong?"

It’s a common reaction. Whether it's exam scores, salaries, or investment returns, we’re wired to
compare. But percentages alone don’t tell the full story.

Let’s break it down with a Systematic Investment Plan (SIP) in a Nifty 50 Index Fund over different
timeframes:

 1 Year: A monthly SIP of ₹40,000/- delivers an impressive XIRR of 39%. However, the
actual wealth created is just ₹1 lakh.

 10 Years: The XIRR is 15%. With a monthly SIP of ₹20,000/-, the investment grows to
₹52 lakhs, resulting in a wealth creation of ₹28 lakhs.

 20 Years: Despite the XIRR settling at 12%, a monthly SIP of ₹10,000/- grows into ₹97
lakhs, creating a wealth of ₹73 lakhs.

Key takeaway: Short-term returns are flashy, but long-term compounding creates real wealth.

Understanding CAGR: The Illusion of Steady Returns

Let’s take the Nifty 50 Index Fund’s CAGR of 15% from April 2019–March 2024. Sounds
predictable, right? Most investors assume it looks like this:

2020:15%
2021:15%
2022:15%
2023:15%
2024:15%

6|Page
Reality, however, is far messier:

2020:-26%
2021:78%
2022:18%
2023:-1%
2024: 30%

The 15% CAGR is just an average—it hides the volatility.

Key takeaway: In equity investing, inconsistent returns are not the exception—they are the
rule.

FINAL THOUGHTS:

Building wealth through disciplined investing is not an overnight process—it typically takes 10-15
years of consistent effort, patience, and regular reviews to see meaningful results. In the early
years, the process can often be very boring or even intimidating at times. It's much like planting
a sapling and patiently waiting for it to grow into a tree that bears fruit. Yes, it can get that boring
at times, especially in the initial years.

"If investing is entertaining, if you're having fun, you're probably not making any money. Good
investing is boring." – George Soros

“Investing should be more like watching paint dry or watching grass grow. If you want
excitement, take $800 and go to Las Vegas.” – Paul Samuelson.

7|Page