Is This the Right Time for Millennials to Invest in Equity Mutual Funds?

I responded, "Yes, the performance of the Indian equity markets has been resilient despite the impact of the second wave of COVID-19 pandemic. I agree that the risk of several waves of the virus is looming. However, with the availability of vaccines, the government undertaking appropriate measures to alleviate the negative impact on the economy and interest rates bottomed out on various traditional investment avenues are encouraging investors to invest equity mutual funds with a long-term approach."

Consequently, due to the market uncertainties some millennials are delaying their investment in mutual funds and are waiting for the 'right time' to invest.

"You see, there are benefits to starting your investment as early as possible instead of waiting for the right time. When you are a new investor, attempting your first investment, the only right time you should consider is to start investing from your first paycheque itself," I added.

Riddhi said, "Alright I understand your point. But, you know, being a millennial I think I have sufficient time to plan my financial goals. Why must I start from the first paycheque?"

I replied, "Riddhi, by starting with your investments early, you will have a longer investment horizon. This allows you to consider calculated high-risk investment avenues (investments in equities are categorized as highly risky) which may potentially earn higher returns. It is a well-known aspect that equity mutual funds generate optimal returns when invested for a longer time. This will help you achieve your anticipated financial goals with time. The earlier you invest, the longer you get to build a large corpus for your retirement as well."

"Moreover, your uncle is right. Smaller SIP investments in equity mutual funds will assist you to apportion an amount from your income easily and inculcate the habit of regular investing."

Riddhi replied, "Oh, now I get why my uncle was insisting on me starting a SIP in equity mutual funds. Thank you Mitali, you have helped me to clear my doubts about investing in equity mutual funds."

Millennials are constantly being advised by their elders to save more and start investing for the future. They are a generation that has grown up in a fast-paced digital world and have a mentality of 'living in the moment'. So, most times, millennials lack of the patience and motivation to invest with a long-term approach.

You see, for millennials it is not easy to allocate a certain amount towards investments when they see peers around them spending lavishly on the latest electronic gadgets, luxuries, etc. Millennials face the fear of social criticism and peer pressure that influences their impulsive spending habits, delaying their wealth creation journey.

Well, you have witnessed the impact of pandemic and seen individuals around you suffer a financial crisis. This is why you need to save and initiate your investments even with a small amount diligently, if you wish your future to be financially secure.

Mutual funds are perhaps one of the few efficient ways for millennials to get started with their investments to create wealth. It also offers them the flexibility of investing a small amount regularly.

The Indian equity markets seem to be unmoved by the uncertainties of the pandemic and the bellwether indices are scaling new highs. It might be daunting for millennials to enter the equity markets. While some may have the knowledge of equity markets, most are still neophytes.

Equity-oriented mutual funds may allocate a major part of your assets to market-linked equity instruments. Thus, fluctuations in the market have an impact on the performance of equity-oriented mutual funds.

Let us understand some elements that are noteworthy for any millennial to consider before investing in equity mutual funds:

1. When is the right time to invest

Equity-oriented mutual funds tend to grow their returns over a period of time, hence the earlier you start investing, the more possibility of healthier returns. In simple words, the right time to invest in equity mutual funds is as early as possible. Waiting for the "right time" leads to missing out on opportunities the market has to offer.

For instance, some millennials did not consider investing in equity mutual funds due to uncertainties amidst the pandemic after the March 2020 lows. However, they missed the earning opportunity when the equity markets bounced back sharply and scaled to all-time highs by the end of 2020.

2. Factors to consider before investing

The primary factors to consider before investing for every individual including millennials remains the same, i.e. risk tolerance, investment horizon, and financial goals. Not all mutual fund schemes carry similar risk; the level of risk in a mutual fund scheme depends on what it invests in.

Equity scheme has the potential to deliver superior returns over the long-term by investing in various equity related instruments that are generally risky in nature. As mentioned earlier, you need to invest in equity mutual funds based on your personal risk profile. If you invest early, with a longer time horizon on your side you would be able to achieve the stated investment objective by aligning the financial goal well.

3. Investment style

Millennials must inculcate the habit of regular investing, which is beneficial to secure the future and influence periodic savings. Investing allows your hard-earned money to grow while you sleep. The equity markets offer the opportunity to compound wealth effectively. You need to consistently invest in the market and hold your investment for a longer time period to earn potential gains.

Equity mutual funds provide you with the option of a Systematic Investment Plan (SIP). It allows you to make small amount of investments, as low as Rs 500, in a suitable equity-oriented mutual fund scheme. This makes it an efficient investment mode for millennials. You do not have to wait for the right time, or invest a large amount.

With the help of SIP, your money works for you by investing in the market every month, acquiring additional units, and allowing it to grow and compound. In addition, compounding has the power of turning smaller investments into a decent corpus if you remain invested for the long term.

4. Diversification

Equity mutual funds consist of several sub-categories across market capitalization, sectors, and themes. You may consider investing in various categories such as large-cap, mid-cap, small-cap, multi-cap, sectoral funds, thematic funds, etc. depending on your suitability.

Diversification is the key to having a robust investment portfolio that can weather the storm. You may also consider diversifying your investments within sub-categories of equity mutual funds. After you have determined your risk profile and investment horizon, you may accordingly allocate in various categories of equity-oriented mutual funds to have a well-balanced and diversified equity portfolio.

5. DO-IT-YOURSELF (DIY) investing

Millennials, compared to the earlier generations, are tech-savvy. Technology has always been a part of their everyday life, especially amidst the pandemic, working from home, shopping, to managing financial requirements online.

The advancements in technology and rise in the number of investing apps can help you perform investments online. These apps offer easy access to market related information and you can even link your bank account to make easy investments. It can also help execute your SIP investments and deduct the desired amount on selected date into mutual fund scheme of your choice.

This has attracted many young investors to consider DIY investing and eliminate the concept of visiting a financial adviser. It offers better control over your investments because you can easily track them. However, while you aim for DIY investments, note that you must choose worthy equity mutual fund schemes to generate optimal returns.

You must do your own research before investing. Never invest in any scheme due to hype or hearsay or tips from friends and relatives. You need to allocate your investment in equity mutual funds based on a long-term performance track record and risk-adjusted returns of the schemes. If you are new to mutual funds, selecting from a large number of schemes across different categories of equity-oriented mutual funds could be complex.

Therefore, you must financially educate yourself on how to fundamentally analyse worthy equity mutual fund schemes and market scenarios. Millennials can consider investing in equity mutual funds by adhering to the above mentioned points. To comprehend and incorporate these points, it is time to empower yourself with the weapon of financial knowledge.

Financial literacy helps you make informed investment decisions. Being a millennial, you must enhance your financial knowledge to have a well-diversified portfolio and a secured financial future.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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