Easy investment guide for Gen Z: Top tips from finance gurus

Gen Z is stepping up as a new wave of tech-savvy investors, ready to dive into the stock market world. According to the study, "Investment preferences among youth in India" (2023), savings accounts and stocks emerged as the top preferences among Gen Z and millennials. While SIPs (mutual funds) and gold continue to maintain their traditional stronghold, crypto slumped, with only 18 percent of young investors favoring it. Also, PPF and National Pension Schemes remained the least lucrative investment options for the particular age group. Experts opine that young working professionals are drawn to investing for a bunch of reasons: the rise of finance content creators on social media, and other online platforms like YouTube making financial information super accessible.

Plus, with the advent of investing apps tailored for this generation, you can start investing with just a few bucks. The buzz around cryptocurrency and the fear of missing out (FOMO) on making big money are also big motivators. Despite their digital savviness, many Gen Z individuals have yet to begin investing. Why? The main obstacles are limited income, everyday expenses and insufficient financial literacy.

To bridge this gap, we consulted finance experts Monika Chopra, Associate Professor, Finance and Accounting, International Management Institute New Delhi and Arun Thukral, Professor of Practice - Finance and Lead, Corporate Relations, K J Somaiya Institute of Management and who break down the basics of stock investing, leveraging technology for growth, and how to dodge common investing errors.

Fundamental principles of stock investing

Chopra: The most important principle for stock investing is to familiarise yourself with the business you wish to invest in. Stocks are nothing but owning a piece of business, so put your money in stocks whose business you understand. Do not simply look for growth in earnings but find out how much cash a company has to invest to generate those earnings. Return on Equity (ROE) or Return on Investment (ROI) are the first key steps to deciding which businesses to invest in.

Thukral: Every Gen Z investor should understand the principle of diversification before entering the stock market. Diversification involves spreading investments across various asset classes, sectors and companies to manage risk and potentially enhance returns.

This strategy reduces the impact of poor performance in any single investment, provides steadier returns and exposes investors to different growth opportunities. For Gen Z, this means balancing high-risk investments like cryptocurrencies with traditional stocks, index funds and ETFs. Embracing diversification helps build resilient portfolios and mitigates risks associated with the "fear of missing out" (FOMO) investing approach prevalent among younger investors.

Leveraging technology and social media

Chopra: Gen Z investors have a unique advantage when it comes to leveraging technology and social media for investment purposes. There are various Investment apps like Robinhood and M1 Finance, educational platforms like Investopedia and Morningstar, podcasts like the CFA Institute podcast and Dave Ramsey show and educational resources from Zerodha University.

Follow financial analysts, economists, and reputable financial news outlets. Accounts like @bespokeinvest, @Business, are great for updates. The best, however, is to read newspapers and stay updated on a regular basis.

Thukral: Gen Z in India can leverage technology and social media for informed investing by using apps like leading brokers for real-time data and analysis. They can also follow credible financial experts and institutions on social media for reliable advice.

Additionally, they can engage with robo-advisors for algorithm-based financial planning. They should explore social trading platforms to learn from successful investors, use AI and big data for personalised financial insights and stay updated on the latest trends in new assets like cryptocurrency. This tech-savvy approach would help Gen Z stay informed and make better investment decisions.

Avoiding common investment mistakes

Chopra: Avoid entering the markets when they are at an all-time high. Avoid the herd mentality. Base your decisions on your own analysis and long-term outlook, not on market trends or peer pressure. Do not go for Investment tips or base your investment on rumours.

As per Warren Buffet "The market, like the Lord, helps those who help themselves," "But unlike the Lord, the market does not forgive those who know not what they do." Do not look for instant gratification; focus on the long term for good returns. Do not try to predict market movement; instead, enter when there is a lot of sorrow in the market. Minimise your investment expenses, fees, etc., and always keep a margin of safety in mind while deciding on the right price for buying a stock.

Thukral: Gen Z in India can avoid common investment mistakes by focusing on diversification through index funds or ETFs instead of picking individual stocks. They should try to develop a long-term strategy and avoid treating investing like gambling.

They should also avoid following self-acclaimed finance influencers and rather make decisions based on personal financial goals. They must balance risky assets like cryptocurrencies with traditional stocks and mutual funds. Most importantly, they should start investing early to benefit from compound interest and invest small amounts regularly.

Also read: How social media content creators are dealing with copycats

Balancing short-term and long-term financial goals

Chopra: Prepare your personal investment policy statement. Lay down your short-term (1-2), long-term (5-10 years), and very long-term (10 years and above) goals. Keep liquidity for the short-term needs and plan the long-term with a mix of equity and debt, depending on your risk appetite. Follow a 100 minus age rule for the percentage allocation to equity.

Prepare a budget and keep track of your expenses. A common budgeting rule where 50 percent of your income goes to necessities, 30 percent to discretionary expenses (including short-term savings for experiences), and 20 percent to savings and investments. Prioritise and spend mindfully to generate wealth over your lifetime.

Thukral: Gen Z in India can balance short-term financial goals with long-term investments by setting clear objectives and using budgeting apps launched by leading banks and Fintechs. They should automate savings through SIPs in mutual funds in liquid, debt and equity schemes.

Apart from this they should prioritise repaying high-interest loans, maximise contributions to the Employees' Provident Fund (EPF) and explore Public Provident Fund (PPF) for tax-efficient growth. This approach will allow these young Indians to enjoy present experiences while building financial security.