Why Millennials should be investing in Mutual Funds

According to Fidelity Investments’ 2016 Millennial Money Study, 60% of young adults are saving for retirement and 62% have an investment account. When it comes to what they’re investing in, Mutual Funds are a top choice.

Millennials, also known as Gen Y, is the generation born between 1982 and 2004. As the first generation to be born into a digital first world how Gen Y goes about investing money is vastly different from the previous generations. For one, the access to quality and accurate information, that’s available with just a click, eliminates the strenuousness in planning for long term financial goals.

Research has shown that the Millennial generation tends to be progressive, risk takers in their investment approach. If, like me, you’re part of the Gen Y then chances are that you’re more self-directed, and proactive DIY investment strategies sound more appealing to you than to wait for your financial advisors.

With members of Gen Y approaching their potential peak earning years and since accumulating wealth requires broader, long-term thinking, there is no better time to get that savings fund growing than now! “It’s the ‘rolling snowball’ effect. The longer you leave your money to work, the more exciting the numbers get,” says Kapil Narang, COO, Ameriprise India.

Where to Invest:

Having been a commerce graduate and a fellow “GenY-ite”, it didn’t take me too long to figure that idle cash lying in your bank savings account or at any other safe place (like FD) does not grow much since the interest on it is only sufficient to cover inflation and does not cause an actual growth in buying power.

But when you invest in Mutual Funds (or other assets), you make your money work for you. Since the amount increases substantially over a considerable frame of time, you can use it to fulfill your long-term needs.

The ideal form of long term investment is through Equity. There are various ways to invest in equity—you can either trade directly or invest through mutual funds.

  1. Equity Trading has higher volatility but for a well informed investor could also reap higher returns. It also requires in-depth research and analysis that not everyone may have the time or aptitude for.
  2. If, instead of buying stocks yourself, you entrust a fund house to do it, you invest in a Mutual Fund. You can put in a lump sum or invest periodically (via Systematic Investment Plans). A Fund Manager actively monitors your investment according to your risk tolerance and financial goals. You may not earn as well as you might through trading stocks, but the risk is also lesser.
Start investing early

Mutual funds can be a less intimidating proposition for adults in their 20s and 30s who may be leery of purchasing individual stocks. Further time is on your side and you should use it well. Owning a portfolio of different mutual fund schemes, where the risk of one evens out with the risk of another, will have expected returns that are far better than the upside of leaving your money parked in a bank. This is the basis of “diversification”. Also, as a lot of experts say, for first-time income earners, it’s safest to start with mutual fund SIPs.

To illustrate – an investment in Direct Mutual Funds with auto-sweep facility, investing Rs 2,000 a month at the age of 20 will have accumulated to Rs 2.40 crore by the time you are 60 years of age (at 12% rate of return). If, on the other hand, you start investing the same amount at the age of 30, you will be able to pile up only Rs 70 lakhs.

Manage the Tax Implications:

You should also be aware of the manner in which your investments are likely to be taxed. When I had just begun work after college, my income wasn’t big enough to file tax returns. Those with a salary of less than Rs 2.5 lakh a year are exempt from filing. However, after a couple of years into work life I had to do so, especially since the gains from my investments rose my income level.

To help from losing out on taxes, I shifted from paying tax on interest every year on my FD account to simply holding my investments in mutual funds.  Long term capital gains from investments in Equity mutual funds are exempt from tax if you hold the fund for more than a year.

How to choose the Mutual Funds:

To simplify, Dhirendra Kumar, CEO of Value Research, suggests the ‘core and satellite’ approach. “Investors should invest 70-80% in core funds and the remaining in satellite funds. You can have 2-3 funds in the core, comprising large-cap and mid-cap funds. The satellite or the smaller component can be made of sectoral and multi-cap funds. This way the investments will be able to absorb shocks and earn high returns over various market cycles.

With the advantage of time, the millennials focus should be in taking a diversified but an aggressive approach. Investments should be made in mutual funds that have a higher concentration of equities than bonds.

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