How Millennials Should Approach Mutual Funds

Suddenly it hit me that we millennials are a generation that transitioned from the old school system to new-age technology. A generation of people born during the 1980s and 1990s, characterised as tech-savvy, ambitious, well-educated, and liberal.

I responded, "As millennials we aspire to follow our own dream, build wealth, and travel around the world, willing to take a sabbatical to pursue our aspirations and always ready to experiment, be it with the different epicurean fare, fashion trends, and even investments. We can never have enough."

Neha jumped in, "Yes, exactly, that's why I called to ask you regarding mutual fund investments, so that I can prove to my parents that I am not being a shopaholic."

[Read: Are These 6 Behavioural Biases Preventing You From Investing?]

(Image source: Money photo created by mego-studio -www.freepik.com)

"What do you want to know?" I asked.

"Aditi, you know how amazing the deals and discounts on Flipkart, Amazon, or Nykaa are! I want to able to spend mindfully and save as well for my future."

I said, "Save first and spend later should be your mantra."

"That's tricky!" Neha quipped.

[Read: 6 Symptoms Of Bad Financial Health]

It's not! Ask yourself.... where do you want to reach and what do you aspire for after a few years (1 year, 3 years, 5 years and so on...), calculate the current cost of that and the impact of inflation on it after that time."

"Right! So for example, if I wish to own a car after 2 years, I need to calculate the future value from the present value of the car."

Yes, so your first step would be to set specific, measurable, achievable, realistic, and time-bound (S.M.A.R.T.) financial goals.

And then:

• Estimate the time and cost involved to achieve the financial goals

• Decide the amount required to invest in the financial goals

• Judge your risk profile whether aggressive, moderate, and conservative

• Chart out an asset allocation (to divided the investible surplus in equity, debt, and gold) based on your risk profile

• Finally choose the right investment combination of various mutual funds to deploy your hard-earned money

"Nice, then I can invest my money in XYZ fund as recommended by my uncle." Neha replied.

"That's not how it's to be done." I continued and Neha was listening intently to what I was about to say next...

"Your investments need to be well-aligned for each financial goal. There's no point investing in an ad-hoc manner or mimicking your friends and relatives and their approach to investments.

Remember, investing is a personal, individualistic exercise. So, don't just heed to your Uncle's recommendation. Or follow the advice of your friends or colleagues when it comes to investing. Or else, as is the case with everything else that you purchase, prefer to buy funds online looking at the star rating.

[Read: Seven Mistakes To Avoid While Investing Online In Mutual Funds]

Star ratings are based on the past performance of a fund. While it can be a starting point to shortlist funds, you cannot base your investment decision merely by looking at star ratings because they are in no way indicative of the future performance. In fact, after the capital market regulator's categorisation and rationalisation norms for mutual funds, you should stop looking at star ratings.

Mutual fund investments with a personalised asset allocation strategy that is based on your risk profile will help you to grow wealth when matched with your goals and time horizon.

When addressing long-term goals, investing through Systematic Investment Plans (SIPs) is potentially worthy to mitigate the risk involved in the path to wealth creation, given the current market scenario.

But, what matters is sensibly selecting mutual fund schemes so as to have the consistently performing ones in your portfolio.  In fact, the topsy-turvy markets separate the smart investors from the others. 

To add mutual fund schemes to the portfolio, dig deeper and evaluate a mutual fund scheme based on various quantitative and qualitative parameters, so as to select only the worthy ones.

Even though your income may not be high at this point, you can start saving a small amount every month and invest via Systematic Investment Plan (SIP) of mutual fund and keep increasing your SIP investments as and when your income increases.

At this point, you may have certain short-term to medium-term goals like building an emergency corpus, buying a vehicle, international vacation, etc., apart from some mandatory long-term goals viz. higher education, wedding expenses (if you are planning to get married in the future), your retirement, and so on.

For long-term goals like retirement, if you want to build a substantial corpus, then as soon as you start earning, start investing a major proportion in equity mutual fund schemes.

For other short to medium-term goals, you may park your money in liquid funds and/or overnight funds.

Once you invest in the endeavour to accomplish your financial goals with all the facts, figures, and timelines in place, review your financial goals regularly. This will enable you to recognise if you are on track and make the necessary adjustments to accomplish the envisioned financial goal/s.

Similarly, there would be certain financial goals which you may have achieved. Strike them off from your financial goal worksheet. Likewise, if you feel there are certain goals which are needed to be adjusted or revisited, do it.

Remember to start investing right away for your successful long-term wealth creation. Saving and investing early helps you build a bigger corpus over a longer time horizon because of the power of compounding.

Well, there isn't a "one size that fits all", investing as per a financial plan is one of the most vital parts for reaching your goals - it acts as a guide. Hence it's crucial to create one and adhere to it diligently. By sticking to it, you will most likely not give in to your emotions of fear, hope, and greed.

Neha was elated to know about mutual fund investments. She thanked me and decided to begin her financial journey right away.

Editor's note:

If you want to begin your journey too but confused about how to select the right mutual fund schemes for your investment portfolio and make your dreams come true, I recommend subscribing to PersonalFN's unbiased premium research service, FundSelect.

Our fund recommendations tend to beat the market by a significant margin over long time-horizons. FundSelect has beaten the market by over 70% in the last decade.

Each fund recommended under  FundSelect goes through our stringent process, where they are assessed and selected on both quantitative as well as qualitative parameters.

With FundSelect, you get access to high quality and reliable funds picked by our research team using their comprehensive S.M.A.R.T. score fund selection matrix.

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Warm Regards,
Aditi Murkute
Senior Writer

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