Mutual Funds For Millennials & Gen Z: Evolving Investment Trends

Millennials and Gen Z are reshaping India’s investment landscape with their digital-first mindset, increasing financial awareness and preference for flexible, cost-effective investment options. Their growing inclination toward mutual funds, particularly through SIPs, underscores a shift toward disciplined, long-term wealth creation. The article explores how the current downturn presents an opportunity for young investors to invest in mutual funds and what they should consider and know before they seize it [EasyDNNnews:PaidContentStart]

The Indian equity markets have experienced considerable volatility over the past few quarters, contributing to a bearish sentiment among investors. However, despite the recent market corrections, investment through the systematic investment plan (SIP) route has remained largely stable—one key factor being the continued participation of Indian millennials and Gen Z in mutual funds. A recent survey conducted by Fin One and Nielsen revealed that 39 per cent of Indian millennials and Gen Z have invested in mutual funds.

Notably, the adoption of SIPs among young investors is on the rise, with 52 per cent of respondents aged 22-35 utilising SIPs to invest in mutual funds—an increase from 44 per cent in the previous year. This trend highlights the growing preference for SIPs as a structured and disciplined approach to investing. Further supporting this shift, a study published in the GAP Bodhi Taru Journal found that 76 per cent of Gen Z investors favour SIPs over traditional fixed deposits, largely driven by expectations of higher returns.

This underscores the generational inclination toward mutual funds as a wealth-building tool. SIP inflows have demonstrated resilience, reaching an all-time high of ₹26,459 crore in December 2024 and maintaining steady levels at ₹26,400 crore in January 2025 before slightly declining to ₹26,000 crore in February 2025. Despite this marginal dip, SIP inflows have consistently remained above ₹25,000 crore since October 2024, reflecting sustained investor confidence despite significant corrections in the equity markets.

For millennials and Gen Z investors, this short-term dip presents a potential opportunity to enter the market and build long-term wealth through mutual fund investments. As investment patterns continue to evolve, disciplined and consistent investing through SIPs remains a preferred strategy for navigating market fluctuations and securing financial growth. As the popular market adage goes, “Every fall is an opportunity if your conviction is strong.”

For young investors with a long-term investment horizon, the current correction could be a disguised blessing, offering the chance to accumulate quality assets at attractive valuations. With India poised for robust economic growth over the next two decades, early investing in mutual funds offers young investors a strategic advantage. By starting early, adopting a balanced approach, and staying invested through market cycles, millennials and Gen Z can harness the power of compounding and generate substantial long-term wealth.

Changing Investment Landscape
India’s financial landscape is undergoing a profound shift, driven by the growing influence of millennials (born between 1981 and 1996) and Gen Z (born between 1997 and 2012). These two generations now account for a significant portion of India’s workforce and consumer base, reshaping the country’s investment patterns and market dynamics. Unlike previous generations, which relied heavily on fixed deposits, real estate and gold as primary investment avenues, millennials and Gen Z are embracing mutual funds as a key avenue for wealth creation, as reflected in the various surveys.

Over the past decade, there has been a sharp increase in the participation of young investors in mutual funds. According to Zerodha’s Product Head, “Gen Z accounts for 50 per cent of all new mutual fund investors since 2020.” India’s stock market is experiencing an unprecedented boom in retail participation. As of September 2024, the number of dematerialisation accounts surged to 175 million, with 4.4 million accounts added in just one month. This growth is primarily driven by Gen Z investors, who are drawn to the accessibility and convenience offered by digital trading platforms.

These platforms have simplified investing by offering real-time data, advanced charting tools, stock SIPs, and social trading features that resonate with tech-savvy younger audiences. Unlike previous generations, who often relied on brokers, today’s young investors prefer greater control over their investments. Digital platforms provide them with both autonomy and guidance, allowing them to make informed decisions in real time.

Investment Psychology of Millennials and Gen Z
Understanding these psychological traits helps explain why mutual funds, particularly SIPs, have gained immense popularity among young investors. Millennials and Gen Z exhibit distinct behavioural traits and attitudes toward investing. Their financial decisions are shaped by technological advancements, major global events, and evolving social norms. Millennials, currently aged between 29 to 44, have witnessed the rise of the internet, globalisation, and financial market liberalisation in India.

Their financial outlook has been influenced by events like the 2008 global financial crisis and the rise of India’s technology and start-up ecosystem. In contrast, Gen Z, currently aged 13 to 28, is the first truly digital-native generation. They have grown up with smartphones, social media, and real-time financial information, which has cultivated a greater risk appetite and a preference for innovative and high-growth investment opportunities.

Both generations display a high degree of financial independence and confidence in managing their investments. However, their motivations and strategies differ in key areas:

■ Risk Appetite: While millennials seek long-term stability through balanced portfolios, Gen Z’s higher risk appetite makes them more inclined toward high-growth sectors influenced by social media trends.

■ FOMO (Fear of Missing Out): Social media platforms like Instagram and YouTube, along with financial influencers, play a pivotal role in shaping investment decisions for both generations. Trending sectors such as electric vehicles (EVs), artificial intelligence (AI), and blockchain often attract significant inflows due to the sense of urgency created by online financial content.

■ Long-Term Focus: Millennials are more focused on achieving long-term financial goals such as homeownership and retirement. Gen Z, however, tends to adopt a more dynamic, short-term approach, often driven by market trends and social media narratives.

■ ESG (Environmental, Social, and Governance) Consciousness: Both generations display a growing preference for sustainable and socially responsible investments. The rising popularity of ESG-focused mutual funds reflects this shift.

Mutual Funds Ideal for Millennials and Gen Z
Mutual funds have emerged as an ideal investment vehicle for young investors due to their flexibility, diversification, and professional management. SIPs allow investors to contribute a fixed amount regularly, making them accessible even to those with limited income in the early stages of their careers. Mutual funds provide access to a wide range of asset classes, including:
1. Equity Funds: High return potential over the long term.
2. Debt Funds: Stability and predictable returns.
3. Hybrid Funds: Balanced exposure to equity and debt.
4. Index Funds: Low-cost funds tracking market indices like Nifty 50 or Sensex.
5. Thematic and Sectoral Funds: Targeted growth opportunities in high-potential sectors such as technology, healthcare and renewable energy.

Power of Compounding
One of the biggest advantages that millennials and Gen Z have is time. Starting early allows them to benefit from the power of compounding, where the returns are reinvested to generate additional returns over time. For example, a ₹5,000 monthly SIP in an equity fund with a 12 per cent annual return can grow to approximately ₹1.76 crore in 30 years. This highlights the power of starting early and staying invested. Long-term investing through mutual funds, particularly via SIPs, allows investors to benefit from the power of compounding and market growth over extended periods.

Compounding refers to the process where the returns earned on an investment start generating additional returns. This creates a snowball effect where even modest investments can grow into significant wealth over decades. Historical data demonstrates that equity markets tend to grow over time, despite short-term fluctuations. The table below illustrates how consistent SIP investments of just ₹1,000 per month over 25 years (a total investment of ₹3 lakh per fund over 25 years) across different equity funds have delivered impressive returns, outperforming market benchmarks. The returns are calculated as of March 12, 2025.

The long-term strategy of staying invested through market cycles, combined with rupee cost averaging, results in significant wealth creation. Young investors also benefit from market recoveries. While markets may experience short-term volatility due to geopolitical tensions, inflation, or economic downturns, long-term growth tends to prevail. For example, after the 2008 global financial crisis, the Indian markets recovered strongly, creating substantial returns for long-term investors who remained invested. The key to successful long-term investing lies in patience and consistency. SIPs allow young investors to weather short-term market fluctuations and benefit from long-term market growth. By starting early, remaining disciplined, and reinvesting gains, millennials and Gen Z can build significant wealth over time.

Choosing the Right Mutual Fund
Understanding your financial goals, time horizon, and risk tolerance is essential when selecting mutual funds. Different types of mutual funds cater to varying risk appetites and financial goals:

1. Small-Cap Funds: These funds invest in companies with smaller market capitalisations. Such funds are highly volatile in the short term but offer significant growth potential over the long term. During bull markets, small-cap funds tend to outperform Large-Cap and Mid-Cap funds, but they are also prone to sharp declines during market downturns. They are best for high-risk, long-term investors with an investment horizon of up to 10 years.

2. Mid-Cap Funds: These funds invest in companies with medium market capitalisations. Such funds offer a balance between the high growth potential of small-cap funds and the relative stability of large-cap funds. While they may experience some volatility, mid-cap funds tend to deliver superior long-term returns compared to large-cap funds. They are best for moderate-risk investors with a time horizon between 5-7 years.

3. Large-Cap Funds: These funds invest in established companies with large market capitalisations. Such funds offer relatively lower risk and steady returns, making them suitable for conservative investors looking for consistent growth. Large-cap funds typically outperform during market downturns due to the stability of large companies. They are best for low-risk, medium-term investors with an investment horizon of 3–5 years.

4. Flexi-Cap and Multi-Cap Funds: These funds provide the advantage of investing across small-cap, mid-cap and large-cap stocks. The fund manager has the flexibility to allocate assets based on market conditions, allowing for better risk-adjusted returns. These funds are ideal for young investors seeking a balanced, diversified portfolio. They are best for moderate to high-risk investors with a long-term horizon.

5. Debt and Balanced Funds: Debt funds invest in government bonds, corporate bonds, and other fixed-income instruments, providing stability and predictable returns. Balanced funds, also known as hybrid funds, invest in both equity and debt, offering a mix of growth and stability. These funds are suitable for conservative investors or those nearing retirement. They are best for low-risk investors looking for capital preservation.

Diversification is the key to managing risk and optimising returns. Young investors should create a diversified mutual fund portfolio by combining small-cap, mid-cap and large-cap funds. Including debt or balanced funds can further stabilise returns and reduce the overall portfolio risk.

Strategizing Mutual Fund Selection
Selecting the right mutual fund requires careful evaluation of several factors:
1. Fund Manager’s Performance: The track record, experience, and investment philosophy of the fund manager play a crucial role in fund performance. A seasoned fund manager can navigate market volatility and make informed investment decisions.
2. Beta and Alpha: Beta measures the fund’s volatility relative to the market. A beta greater than 1 indicates higher volatility. Alpha measures the fund’s ability to generate returns above the benchmark — higher alpha indicates better performance.
3. Sharpe Ratio: This measures risk-adjusted returns. A higher Sharpe ratio indicates better returns for the level of risk taken.
4. Standard Deviation: A higher standard deviation indicates greater volatility, which could result in higher returns or losses.
5. Capture Ratio: A high up-market capture ratio of greater than 1 shows that the fund outperforms the benchmark, while a market capture ratio of less than 1 indicates the fund underperforms its benchmark. Example: A high Sharpe ratio means better returns for the risk taken. A high capture ratio indicates that the fund outperforms the market during the uptrends and loses less during the downtrends.
6. Expense Ratio: Lower expense ratios result in higher take-home returns.
7. Consistency in Returns: Look for funds that deliver consistent returns over various market cycles rather than just short-term outperformance.

Common Mistakes to Avoid
■ Chasing Past Performance: Past performance doesn’t guarantee future returns. Focus on consistency and long-term performance instead of short-term spikes.
■ Lack of Diversification: Investing too heavily in a single fund or sector increases risk. Spread investments across different asset classes.
■ Timing the Market: Market timing is nearly impossible to get right consistently. SIPs help avoid this by enabling disciplined investing.
■ Ignoring Costs: High expense ratios and hidden fees can eat into returns over time.
■ Emotional Decisions: Avoid reacting to short-term market movements. Stay focused on long-term goals.

Conclusion
Millennials and Gen Z are reshaping India’s investment landscape with their digital-first mindset, increasing financial awareness and preference for flexible, cost-effective investment options. Their growing inclination toward mutual funds, particularly through SIPs, underscores a shift toward disciplined, long-term wealth creation. The surveys discussed above reveal a strong savings culture among young investors, with a majority saving 20-30 per cent of their income and prioritising financial security, emergency funds, and personal goals. While mutual funds remain a favoured investment avenue, direct stock investing is also gaining traction.

Nevertheless, the recent fall will test their patience and may further shift them towards mutual funds. The stability of SIP inflows reflects their confidence in the long-term growth potential of mutual funds, despite market volatility. Education plays a crucial role in shaping investment decisions, with YouTube emerging as the most preferred learning platform, followed by family referrals, social media, and financial advisors. By leveraging early investments, maintaining a disciplined SIP approach, and embracing diversification, millennials and Gen Z can build substantial wealth and secure their financial future.

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