If you’re a millennial or part of the Gen Z in India, it’s time to pay attention to how your peers are shaping their financial futures. In 2023 alone, an impressive 72% of millennials have started investing through SIPs. As for the remaining 28%, they opted for lump-sum investments, demonstrating a bold step towards building their wealth.
But that’s not all.
Gen Z’s interest in investing in stocks and mutual funds is growing. Over 50% of Gen Z plan to increase their investments in the stock market this year.
This is a higher percentage than the 43% of millennials who plan to increase investments. The data highlights rising enthusiasm for investing in the stock market among younger generations, especially Gen Z.
It can certainly make you think about your own investments!
The current investment landscape has evolved tremendously. With the myriad share market apps that are readily available, investing has become simpler and more accessible. Let’s explore how you can fully utilise these opportunities!
Why are Mutual Funds a Good Option for Millennials and Gen Z?
Mutual funds are gaining traction as the investment of choice among the younger crowd, particularly millennials and Gen Z. The last five years have witnessed a significant increase in mutual fund engagement, with millennials at the forefront.
Approximately 54% of the new 1.6 crore investors in mutual funds from FY19-23 were millennials. This means that about 85 lakh young investors are adopting this investment approach.
Anyone can start investing in mutual funds with very low amounts. You can begin your journey with minimal investments starting from Rs 500!
This low initial requirement allows you to begin investing without the pressure of a significant financial commitment. It offers an easy and cost-effective way to start building your portfolio, even if you’re not prepared to allocate large sums immediately.
As a millennial, you’re likely in your late 20s or early 30s. This positions you perfectly to leverage the long-term growth potential of mutual funds. With a longer investment horizon, you have the advantage of time to ride out market volatility.
Consider this – equity mutual funds have averaged a return of 16.30% over a 25-year span. If you had invested Rs 1,00,000 into a well-performing mutual fund 25 years ago, today it could be worth Rs 50 lakh, a 50-times growth!
Inflation is a crucial factor to consider for any long-term financial planning. Over the last two decades, the average rate of inflation has been 5.5%. Historically, mutual funds, especially those in equity, have consistently offered returns that not only keep pace with but frequently surpass this rate of inflation.
In contrast, traditional investment options like fixed deposits often struggle to outpace inflation, especially after accounting for taxes.
Superior Returns Compared to Other Assets
When it comes to achieving a high real rate of return, which is the return after adjusting for inflation, equity mutual funds stand out. They have consistently delivered higher returns compared to other asset classes like gold, which has a real rate of return of around 4.46%.
In comparison, equity mutual funds have provided returns of about 10.18%. This difference highlights the potential of mutual funds to significantly enhance your wealth over the long term.
What are the Best Mutual Funds for Millennials and Gen Z?
As a millennial or Gen Z investor looking to make smart investment choices, understanding the types of mutual funds that resonate with your peers can be quite enlightening.
The latest CAMS report examined mutual fund trends specifically among new millennial investors in FY 2023, totalling 14.7 lakh individuals. This number demonstrates the growing demand for fund products that cater to millennial interests and objectives.
Here’s a breakdown:
|
Type of Fund |
Percentage of New Millennial Investors |
|
Equity-Linked Savings Scheme (ELSS) |
8% |
|
Flexi Cap Funds |
13% |
|
Large Cap Funds |
7% |
|
Mid Cap Funds |
8% |
|
Multi Cap Funds |
6% |
|
Sectoral/Thematic Funds |
21% |
|
Small Cap Funds |
13% |
|
Value/Contra Funds |
8% |
|
Balanced Hybrid Funds |
4% |
|
Aggressive Hybrid Funds |
Not Specified |
|
Other Funds |
13% |
Source: moneycontrol.com/news/business/personal-finance/54-of-new-mutual-fund-investors-are-millennials-10535441.html
Optimal Fund Types for Millennials and Gen Z
Flexi Cap Funds: These funds invest in a mix of large, mid, and small-cap stocks, providing both stability and the chance for growth. They’re a good match if you want a fund that covers different sizes of companies.
Interestingly, about 90% of millennials’ investments in equity funds fall into this category, showcasing their preference for diversified equity exposure
Index Funds: Index funds mirror specific market indexes like the NSE Nifty or BSE Sensex and are known for their lower costs and hands-off approach. They’re a solid choice if you’re looking for an investment that tracks the overall market performance.
With a commitment of at least seven years, you can generally expect returns between 10% to 12%.
Equity-Linked Savings Scheme (ELSS): ELSS funds not only help you save tax under Section 80C but also offer the potential for high returns. They’re an excellent option for those aiming to reduce their tax liability while investing in the equity market.
On average, ELSS funds have been known to deliver about 12% returns over a 10-year period.
How to Choose a Mutual Fund Based on Personal Goals and Requirements
Understand Your Risk Appetite: Do you lean towards investments with higher risks for the chance of greater returns, or are you more inclined towards safer, low-risk options? Your risk tolerance is a key factor in selecting the right fund.
Investment Horizon: If you have a long-term goal, equity funds, including flexi-cap and sectoral funds, might be more suitable. For shorter-term goals, consider debt funds or money market funds.
Financial Goals: Are you saving for a house, retirement, or building an emergency fund? Your goals dictate the type of mutual fund you should opt for. For instance, if your goal is long-term wealth creation, equity-oriented funds are often the better choice. On the other hand, for short-term objectives, you might find debt or liquid funds more suitable.
Past Performance and Fund Management: Look at the fund’s historical performance and the fund manager’s expertise. Consistent performance over the years is a good indicator of a fund’s potential.
Expense Ratio and Exit Load: Be mindful of the costs associated with the fund. A higher expense ratio can eat into your returns. Also, check the exit load, which is a fee charged for withdrawing your investment before a certain period.
Tax Implications: Funds like ELSS offer tax benefits, which can be a deciding factor if tax-saving is one of your goals.
By carefully considering these aspects, you can choose a mutual fund that aligns with your personal goals and investment style, paving the way for financial freedom.
What to Know Before Starting Your Mutual Fund Investment Journey?
Before starting your mutual fund investment journey, it’s crucial to do your homework. Here are a few key points to consider:
The first step is due diligence. Take the time to research and compare various funds, focusing on those that best align with your investment goals and risk appetite.
Next, consider the type of investment that suits your financial situation. Are you more comfortable with a Systematic Investment Plan (SIP), where you invest a fixed amount regularly? Or does a lump-sum investment align better with your financial plans?
Remember, consistency is the key to investing. Regular and disciplined contributions to your chosen fund can significantly enhance your returns.
Be mindful of the expense ratio of the funds you choose. These fees can vary and will affect your overall returns. Also, understand the lock-in period, especially for tax-saving funds like ELSS. This period is your investment’s commitment time – a phase where your funds mature without disturbances.
Investing early is essential for building long-term wealth. However, many beginners find the process challenging and complex. This emphasises the value of intuitive tools like Appreciate that simplify investing for first-time investors.
With the right share market app, you can manage your investments efficiently and step confidently towards financial freedom.