How Millennials Should Plan Their Investments for a Wealthy Future

The harmful second wave of COVID-19 pandemic has taught us that uncertainties of any magnitude can set you back on your financial goals. Besides the rising concerns around affordable medical insurance and healthcare, maintaining financial stability has been among the top priorities for most individuals.

Similarly, millennials for that matter have experienced a crisis early on in their lives, which is the transformative COVID-19 pandemic. Some lost their jobs, went through pay cuts and some were unable to reach their financial goals this year. The pandemic has served as a wake-up call, encouraging millennials to plan their savings and investments effectively for a more secured financial future.

Consequently, millennials and young professionals are now thinking about constructing their financial assets through investment portfolios earlier in their life, to keep up with an uncertain world. However, there are various reasons hindering millennials from making investments in various financial products.

Most millennials may have debts to pay, mostly in the form of education loans, EMIs on depreciating assets such as cars, bikes, mobile phones, etc. This reduces the amount to be allocated towards savings and investments. In addition, you may lack adequate knowledge about investing and thus, fear the loss of your hard-earned money, especially seeing how the markets crashed in March 2020.

When it comes to financial investment portfolios, the bygone year has brought to the forefront the need for having certain vital elements that can help navigate tough times with ease.

​Let us have a look at few important elements that you need to consider while planning your investments:

1. An Emergency Corpus

To build an emergency corpus, you need to apportion a certain amount from your income and invest it into any financial instrument that can readily convert into cash such as liquid funds and recurring deposits. An emergency corpus is a rainy day fund built for emergencies and unforeseeable events.

You see, when there were job loss and salary deductions due to the pandemic, individuals who had an emergency fund could survive better. The emergency fund meets your regular household expenses and even meets essential commitments such as loan EMIs, utility bills etc.

It is advisable to invest in building an emergency corpus to safeguard your financial future from unforeseen crisis. You must have a rainy day fund equivalent to at least 12 to 24 months of expenses including loan EMIs. This will provide you with more flexibility in case the uncertainty drags longer than anticipated.

Notably, while building an emergency corpus returns are secondary and you must invest in financial instruments that can be liquidated hassle-free.

2. Goal-oriented Investments

Goal-setting is the first step in building a financial plan for long-term wealth creation. Whether you want to buy that first car in three years or go on an international trip five years down the road, allocating specified investments for these goals is a great way of planning for a wealthy future.

Whether you are keen on dipping your toe into equity with mutual funds or are looking for more low-risk investment options like FDs and Bonds or planning for retirement, you need to set S.M.A.R.T financial goals. While planning your investments, you need ensure it is based on your risk profile and investment horizon. Moreover, make sure your investments are aligned in a manner that helps achieve greater tax efficiency. It is advisable to save your money under ELSS for tax benefits and capital appreciation as they provide a good rate of return.

You may consider investing in mutual funds to achieve your envisioned long-term financial goals. Investing through the route of Systematic Investment Planning (SIP) provides you with the benefit of rupee cost averaging.

As technology and ideology put a spin on how we look into our financials, there are many more investment opportunities beyond traditional offerings. Millennials are taking advantage of these new fields of investment that focus on companies having a positive effect on the environment, society and technological growth. This helps you build your investment portfolio with an approach towards potential growth in the future.

3. Asset allocation and Diversification

Asset allocation is an ingredient for risk management and you must attain ideal allocation towards various asset classes while planning your investments. Millennials should not choose only one particular asset class, as no two asset classes perform in the same direction.

Equity asset class has been gaining a lot of attention, especially among millennials. It is known for giving higher returns and you can choose from several long-term funds. If you are looking for regular income and are risk averse, you may consider investing in debt securities, money market instruments, Public Provident Fund, and so on. Also, you may hold a combination of fixed income and equity asset class to have a better diversification in your investment portfolio.

You could face market fluctuations; hence a well-diversified portfolio holding investment in various asset classes can be a better shock-absorber when markets nosedive. It could be advantageous to have a decent allocation across market capitalisation. As the risk is divided across asset classes, the non-performance of one class is made up for by another. It may help you leverage growth opportunities in a particular sector, which is not possible if you concentrate your investments only on one segment.

Portfolio diversification provides stability during volatile times by balancing risks, thus giving you peace of mind. However, you must ensure that there is no over-diversification across too many asset classes, which will impact your gains and limit the returns.

4. Insurance cover

Another must-have while planning your investments is an insurance cover for life and health. This prevents out-of-pocket expenses in case of medical emergencies and does not dry up your savings. Considering the rise in medical expenses has made it imperative to have an insurance cover for yourself and your loved ones.

A medical contingency may burn a hole in your wallet, but with health insurance you don't have to worry about non-availability of funds. And with the help of life insurance, your family could fulfil financial requirements and stay financially independent in your absence.

If you lack an insurance cover, you may have to direct your savings towards the emergency and it can jeopardise your essential financial goals and commitments. Given that uncertainties could strike anytime, it's prudent to remain financially secured with an insurance cover.

5. Retirement Planning

Most millennials do not think much about investing early for retirement. You may feel that investing for a goal that is 20-30 years into the future is best done after the age of 30. Investing in shares and mutual funds is attractive now as you have a higher risk appetite and are looking to earn higher returns on your investments.

It is advisable to start planning for your retirement as early as possible, this way you could build a large corpus and benefit from the effect of compounding. Post retirement, you may not have a fixed income source and in order to meet your financial requirements and remain financially independent, you must consider investing in retirement plans early in life.

Retirement planning is an important aspect of your investment portfolio to obtain a wealthy financial future.

Keep in mind, it is not an easy task to build a wealthy future and as mentioned above, many millennials lack financial knowledge and keep delaying their investments. If you are financially conscious, you will have a better grip on your finances and could reduce your debt burden as well.

You could empower yourself with financial knowledge and become your own financial planner by comprehending the finer nuances of financial planning. You would be able to efficiently plan your investments, make informed financial decisions and consider the above elements to build a wealthy financial future.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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