Should I start SIPs or buy insurance in my early twenties?

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The financial awareness among youth while still low is gradually improving. They are no longer dependent on their fathers or other relatives to take care of their taxes and investments. They are taking the matter in their own hands. Young professionals in their early twenties often wonder if they need an insurance given no liabilities on them. There is only so much they can spare in their starting salary. Should they focus more on investments or buy an insurance too? Money9 Helpline approached Raj Khosla – managing director & founder, MyMoneyMantra to get an expert advice:

Anish Tiwari, Indore: I am 22 years old. My annual income is less than Rs 4 lakh. I started my professional career just six months ago. I don’t have any liabilities as of now but an insurance advisor asked me to buy a term insurance stating that the premium is very low. He also explained the tax benefits of it. What should I do? Should I buy a term plan or start mutual fund investment?

Raj Khosla: Insurance and Investment are two parallel aspects of portfolio management. You do not choose between the two, instead walk along both paths, thereby ensuring financial security. At 22, you do not have any liabilities and have enough time in hand for setting up a financial plan. It is thus the right time for developing a savings habit and creating financial goals for short, medium and long-term needs and determining an appropriate asset allocation.

You should certainly buy adequate health and term insurance plans while aligning small yet, consistent systematic investment plans (SIPs) for retirement corpus as well as various life goals. At this age, you can buy health insurance cover of Rs 10 lakh at Rs 7,000 annual premium and term cover of Rs 1 crore for Rs 15,000. Starting early will give you benefits in terms of pricing as well as additional features. So, you should definitely not delay the decision. Also, you will be eligible for claiming an annual deduction of up to Rs 25,000 u/s 80-D for medical insurance, and a further deduction on premium paid for term insurance u/s 80-C of I-T Tax Act, 1961.

Coming on to investment side, starting early helps you enjoy the power of compounding. Sooner you start your mutual fund investment journey, the better it is for your wealth creation goals! For example- simply aligning Rs 10,000 per month for next 20 years can help you accumulate a corpus of Rs 1.5 crore at 15% annualised returns. However, delaying this investment by five years will fetch you only Rs 67 lakh after 15 years with same monthly investment plan.

To start with, begin investing Rs 10,000 monthly SIPs in a mix of 3-4 large cap and flexi cap equity funds. MF SIPs offer full flexibility of entry & exit with minimal cost barriers and thus are one of the most attractive investment routes. Increase SIPs as you progress in your career, resulting in larger inflows. Also, invest regularly in a PPF account for long term guaranteed tax-free returns for a safe retirement corpus. Review your portfolio once in 3 years and take the help of a financial advisor for detailed financial planning.