Mutual Funds For Millennials

A significant shift is underway in India’s financial landscape – the rise of millennial investors. Individuals born between 1980 and 1995, grouped as millennials, are actively reshaping the investment industry in their 30s and 40s. And their preferred avenue is mutual funds. The article highlights the details of the trend 

Previously shrouded in mystery and considered exclusive to seasoned investors, mutual fund investing has transformed into a reliable wealth creation method. According to the Computer Age Management Services (CAMS) report, over the last four years (FY 2019-23), an impressive 54 per cent of new mutual fund investors were millennials. This means out of a total 1.6 crore new investors, 85 lakh investors were millennials. This emphasises how mutual funds are being considered as an investment option by millennials. The same report also indicates that millennials preferred sectoral or thematic funds over other equity mutual funds’ categories. 

The graph above clearly shows that about 21 per cent of the millennials preferred investing in sectoral and thematic funds over other equity mutual funds. This data shows that the preferred risk-reward ratio of the millennials is on the higher end. It also points towards the psychology of making quick money. Is it the right way by millennials to approach their financial planning? To get deeper into this, in this article, we will try and understand how millennials should plan their finances and why mutual funds are one of the best ways for them to begin their investment journey. 

Millennials and Financial Planning
Millennials face distinct financial challenges and opportunities compared to earlier generations. Many grapple with burdensome student loan debt, escalating living expenses and uncertain job prospects. However, they possess the advantage of time for long-term financial planning and investment. Below, we have compiled essential financial planning tips tailored for millennials to navigate these financial landscapes effectively 

Creating a written budget is a fundamental stride in managing finances. Start by outlining monthly income and expenditures, categorising them into essential and non-essential expenses. This practice aids in pinpointing areas for potential savings and expense reductions. Commencing savings early holds significance for long-term financial stability. Aim to set aside a minimum of 15 to 20 per cent of the income. Allocating a portion towards an emergency fund and directing the remainder towards financial objectives can yield fruitful outcomes. 

Avoid accumulating excessive debt through unaffordable major purchases. Prioritise settling high-interest debts, such as outstanding credit card balances. In instances of substantial credit card dues, contemplate transferring them to a personal loan to alleviate the impact of interest. Effective debt management is pivotal for successful financial planning. Having a contingency fund is advisable to navigate unforeseen circumstances, such as job loss. Strive to save a reserve equivalent to 3-6 months’ worth of expenses as an emergency fund. Beginning with investments early holds immense benefits. 

Initiating investment, even with modest amounts, sets the groundwork for a robust investment portfolio. Further insights on this topic are detailed in the subsequent section. Deliberate investment in mutual funds presents an excellent avenue for achieving financial goals. Employing systematic investment plans (SIPs) in mutual funds stands as a prudent initiation into the investment sphere. This not only fosters a habit of saving but also aids in wealth accumulation over extended periods. Diversifying investment portfolios across multiple asset classes serves to mitigate risk. 

Equities, debts, gold, real estate and commodities, among others, stand as common asset classes millennials can consider for diversification. However, thorough research and comprehension of the risks and merits of each investment avenue are imperative. Exercise caution against lifestyle inflation. While increased income may prompt elevated expenditure, mindful management is pivotal. Elevated lifestyle expenses wield enduring impacts not just on finances but also on emotional wellbeing. Thus, with a well-structured budget, planning such expenses becomes a more measured approach. 

Engaging in a side hustle offers an avenue to augment income and bolster savings. Explore opportunities to leverage skills and interests outside regular employment, thereby supplementing income streams. Recognising the uniqueness of individual financial circumstances is paramount. Establishing a budget, settling high-interest debts, establishing an emergency fund, initiating early investments, diversifying investment portfolios, optimising retirement contributions and vigilantly monitoring investments contribute to a robust financial groundwork. Bear in mind that financial planning is a long-term endeavour, requiring discipline and adherence irrespective of market fluctuations. 

Millennials and Mutual Funds
It is commonplace for millennials to allocate a significant portion of their earnings without contemplating the future during their early years. However, initiating savings early holds paramount importance in avoiding financial concerns later in life. If you belong to the millennial cohort and have yet to consider saving, initiating investments now can significantly benefit your future self. Among the array of investment avenues available, young adults can explore the potential of mutual funds. 

The advantages of investing in mutual funds, especially when started early, play a pivotal role in establishing a robust financial foundation for the future. Here are the key reasons emphasising the significance of mutual funds for millennials: 

1. Long-Term Investment Outlook - Millennials, primarily in their late 20s or early 30s, possess a luxury, which is time. This timeframe allows them to navigate market volatility effectively. Consider this scenario: by investing ₹10,000 monthly from age 25 to 55, assuming a 12 per cent return, the principal investment of ₹36 lakhs matures into a staggering ₹3.5 crore over 30 years, factoring in the added rate of return.
2. Leveraging the Power of Compounding - Long-term investments enable leveraging the power of compounding whereby the interest earned is reinvested, thus contributing to the principal sum. Investing early, even in smaller amounts, yields significant returns over time due to compounding effects.
3. Combating Inflation - When planning future expenses, accounting for inflation is crucial. Assuming a 6 per cent inflation rate, current expenses of ₹30,000 per month may soar to ₹96,000 in 20 years. Investing in avenues capable of generating returns surpassing inflation becomes essential. Mutual funds, unlike traditional options such as fixed deposits, present an opportunity for substantial long-term returns to counter inflation.
4. Realising Financial Goals - Individual aspirations necessitate financial resources. Whether it is launching a business, purchasing a home, or other personal goals requiring substantial funds, investing in mutual funds early facilitates the accumulation of a corpus essential for achieving these objectives through investment returns.
5. Lower Minimum Investment Amount - Concerns about initial investment size often trouble millennials starting their careers. Mutual funds, however, offer a solution with their low minimum investment amount. Depending on the chosen scheme, investments can start as low as ₹100. Consistently investing small amounts monthly can gradually build a substantial corpus over time. 

Mutual Fund Investing Process for Millennials 

Millennials keen on investing in mutual funds have two avenues: offline and online. Opting for the offline route involves purchasing mutual funds by visiting the nearest fund house branch or through a distributor. Surprisingly, a CAMS study highlights that 95 per cent of new millennial investors prefer advisers or distributors for their mutual fund investments. However, given the tech-savvy nature of most millennials, online mutual fund investments offer simplicity. 

Here’s how to kick-start your investment journey:
1. Official Asset Management Company (AMC) Website - Each AMC hosts its official website, providing a repository of various mutual funds across categories. Upon logging in, explore the available funds and follow the website’s outlined steps for investment. Simply fill in the required details as instructed and proceed. Completing the Know Your Customer (KYC) process online (e-KYC) using your Aadhaar card and PAN card is essential. Once the verification process is done, you are ready to commence mutual fund investments.
2. AMC Mobile Applications - Presently, AMCs offer mobile applications for investors’ convenience. Through these applications, investors can invest in mutual funds, execute buy or sell orders, access account statements and retrieve other investment portfolio details.
3. Mutual Fund Platforms - Several platforms aid in mutual fund planning and investment. Most of these platforms offer mobile applications for ease of access. Moreover, these platforms provide access to a wide array of mutual fund schemes across multiple AMCs. Notably, the MF Central App, a collaborative effort between CAMS and KFintech, is also a good option that facilitates mutual fund investment and management. 

Points to Remember
Across the globe, numerous studies have historically aimed to dissect the variance between mutual fund returns and actual investor returns. A primary contributing factor found was a lack of discipline among investors. The tendency to frequently buy and sell mutual fund investments, deviating from longterm commitments, led to this divergence. Recent data from the Association of Mutual Funds in India (AMFI) indicates that only half of the equity mutual fund investors stay invested for over two years, while the figure stands at 30 per cent for non-equity funds. The attainment of financial goals significantly relies on disciplined investing. 

Here are key considerations for millennials before venturing into mutual fund investments:
1. Define Investment Objectives - Determining your investment goals, along with considering your financial aspirations, investment horizon and budget, is imperative before delving into mutual fund investments. Understanding your risk tolerance is equally crucial to choose an appropriate mutual fund scheme.
2. Select Suitable Mutual Fund Categories - Conduct thorough research into the diverse categories of mutual funds available. Understanding the varying types, associated risks and potential returns empowers you to align your choice with your risk appetite. For instance, conservative investors may find stability in Debt Funds due to their lower risk profile and consistent returns.
3. Shortlist and Analyse Mutual Fund Schemes - Given the array of available categories, meticulous analysis of mutual fund options becomes essential. Consider aspects such as expense ratios, portfolio components, assets under management and the experience and qualifications of the fund manager before committing to an investment.
4. Seek Advice from Financial Experts - Venturing into the realm of mutual fund investments can seem daunting initially. For first-time investors concerned about decision-making, seeking guidance from a financial expert is advisable. A specialist in mutual funds can assist in selecting a suitable scheme aligned with your profile and track the performance of your investments. 

Boosting Portfolio Returns
For those new to mutual funds, commencing investments through SIPs offers a gradual approach. Even with modest monthly investments, you can steadily nurture your wealth. Persisting with mutual funds via SIPs leverages the power of compounding, facilitating long-term financial growth. Consider these key factors to boost your portfolio returns:
■ Embrace Portfolio Diversification: Striving for a diversified portfolio spanning multiple asset classes is an ideal pursuit. This approach enables you to enhance portfolio returns by balancing risk and returns effectively.
■ Exercise Caution in Redeeming Investments: New millennial investors in mutual funds might encounter apprehension during initial investments, especially amid market downturns. It is vital to recognise that markets undergo recoveries post declines, and fluctuations are inherent to investments. Refrain from impulsive decisions that might detrimentally impact your portfolio. Maintain composure during market falls to avoid hasty redemptions.
■ Regular Portfolio Review: Consistent reviews of your investment portfolio are indispensable. These assessments aid in aligning investments with your risk tolerance, market trends and financial objectives. Adapting investments to prevailing market conditions remains pivotal, especially with a long-term investment outlook.
■ Continue SIPs amid Market Volatility: Market volatility, prompted by inflation or geopolitical tensions, can prompt uncertainty. However, refraining from halting mutual fund SIPs amidst such turbulence is advisable. Abruptly ceasing SIPs during volatile periods contradicts the core principle of SIPs designed for long-term investment objectives, potentially impacting portfolio returns. 

Cost of Delay
Repeatedly postponing investments, even by a mere 24 hours, seems inconsequential to many. However, this habit of delaying investments can lead to unexpectedly high costs. Let us understand this with the help of an example. 

Let us assume you start investing Rs 5,000 per month via SIP for 30 years assuming 12 per cent compounded annual growth rate (CAGR). After 30 years, you would accumulate around Rs 1.77 crore with a total principal investment of Rs 18 lakhs. However, as you delay your investments by three years, five years or ten years, you end up with lower corpus. Moreover, with every delay of five years, the corpus shortfall increases by around 50 per cent. 

Conclusion
In the realm of mutual fund investments, the journey for millennials is both promising and nuanced. To steer through these financial waters successfully, actionable steps must merge with disciplined commitment. Begin by defining clear investment goals, accounting for your financial aspirations, risk appetite and investment timeframe. Educate yourself on diverse mutual fund categories, meticulously analysing risks and potential returns to align choices with your risk tolerance. 

Seeking guidance from financial experts could provide invaluable insights, particularly for those treading the investment landscape for the first time. Flag off your investment journey early, nurturing it with SIPs to benefit from the compounding effect for long-term wealth creation. Diversification across multiple asset classes stands as a prudent strategy to balance risks and augment potential returns. Throughout market fluctuations, maintain composure, avoiding impulsive decisions, and adhering to a regular portfolio review to adapt to evolving market dynamics. 

Upholding SIPs during market volatility underlines the essence of steadfastness in long-term investment objectives. Remember, success in mutual fund investments hinges on discipline, continuous learning and a resilient long-term outlook. Embrace these principles as guiding beacons on your financial voyage, allowing them to fortify your investment endeavours. By employing these prudent practices, you are poised to chart a course towards a more secure financial future.