If you are wondering about the importance of investing in mutual funds at an early age, take a look at the following pointers that explain how this can be a financially rewarding move.
At a young age, it is quite common for millennials to spend a large chunk of their earnings without worrying much about the future. However, it is of immense importance to start saving early to not face any financial worries later on in life. If you are part of the millennial generation and haven’t really given a thought towards your savings, you might want to start investing your money and do your future self a huge favour.
While there are a lot of investment options out there, young adults can consider investing in mutual funds. There are a host of benefits to investing in mutual funds, and starting off early can be crucial in achieving a sound financial corpus for the future.
If you are wondering about the importance of investing in mutual funds at an early age, take a look at the following pointers that explain how this can be a financially rewarding move:
1. You have a long investment horizon
The millennial generation are in their late 20s or early 30s. As a millennial, you can effectively cancel out the market volatility since you have the luxury of time by your side. Let’s take an example to understand this – You start investing Rs 10,000 every month from the age of 25 years till you reach the age of 55 years. Assuming the rate of return to be 12%, your principal investment portfolio would reach Rs 36 lakh at maturity. Adding the rate of return to your investment corpus over 30 years, the total value would touch Rs 3.5 crore at the time of maturity.
2. Mutual funds offer the power of compounding
Another benefit of a long-term investment horizon is that you can take advantage of the power of compounding. Compounding involves the amount of interest earned on the investment getting added back to the principal amount. The interest is then calculated based on the new principal amount, which keeps growing every year. This means that investing early and over a long period of time, even if it is in small amounts, can result in significant returns with the effect of compounding.
3. This investment can help in beating inflation
When you are planning how to manage your expenses in the future, it is essential to factor in inflation. Considering the inflation rate to be 5.5%, if your monthly expenses are currently at Rs 40,000, this amount would reach Rs 69,000 10 years down the line counting inflation. This is why it is advisable to make investments that have the potential to generate inflation-beating returns. While traditional investment options such as fixed deposits might barely make the cut, investing in mutual funds is a decision that can generate long-term returns to overcome inflation.
4. You can achieve your financial goals
Everyone has different dreams, and they need the financial means to achieve these goals. For instance, you might want to start a business in the future, buy a house, or any other personal goal for which you would need a sizable corpus. By investing in mutual funds from an early age, you can successfully save up a corpus through the investment’s returns to achieve your financial goals.
5. Mutual fund investments have a low entry barrier
One common concern that millennials have is that since they are at the beginning of their careers, it is quite difficult to keep aside a sizable amount for investing in mutual funds. Now, another advantage of investing in mutual funds is that you do not need to have huge sums of money. Mutual fund investments have a low entry barrier and depending on the mutual fund scheme you have chosen, the investment amount can be as low as Rs 100. You can keep investing small amounts every month and grow your corpus with time.
There are two ways in which you can invest in mutual funds i.e., offline, and online. Those wishing to go the offline route can buy mutual funds by visiting the nearest branch of the fund house or through a distributor.
With most millennials being tech-savvy, investing in mutual funds online can be quite simple. Here’s how to get started -
Create an account on an official AMC website
Each AMC (Asset Management Company) will have its own official website. Once you log on to that website, browse through multiple mutual funds in each category. The website will provide detailed steps for investing, so just go through these instructions, fill all the required details, and submit them. You will also have to complete a KYC process online (e-KYC). All you need for this is your Aadhaar card and PAN card. Once these details are verified, you can start investing in mutual funds.
Use a mobile application
Today, AMCs also have their mobile applications that investors can use. You can use an AMC’s mobile application to invest in mutual funds, buy/sell units, view account statements, as well as check any other details regarding your investment portfolio.
Things to keep in mind before investing in mutual funds
1. Set an investment goal
There are multiple factors that will impact your mutual fund investment. You need to be clear about your financial goal, investment horizon, and budget before investing. You also need to understand your risk appetite before opting for a particular mutual fund scheme.
2. Choose your preferred type of mutual fund investment
You need to research the various mutual fund categories since there are multiple kinds of funds to invest in. Once you understand the different types and the involved risks and potential returns, you can choose a mutual fund scheme depending on your risk tolerance. For instance, if you are not an aggressive investor, you can consider opting for debt funds given their low risk and stable returns.
3. Opt for a mutual fund scheme from your shortlist
With multiple categories to choose from, make sure to analyse and evaluate the numerous mutual fund options available. Consider all the factors such as expense ratio, portfolio components, assets under management, and even the fund manager’s experience and qualifications before making an investment.
4. Take guidance from a financial expert
Getting into the world of mutual fund investments might seem overwhelming at first. If you are doing this for the first time and are worried about your decisions, it is advisable to take help from a financial expert. A mutual fund specialist would be able to help with choosing a suitable scheme as per your profile and even track the performance of your investments.
1. Invest in mutual funds via SIPs
Since you are new to mutual funds, you can start by making SIP payments towards your mutual fund investment. Even with small amounts invested every month, you can steadily grow your wealth. Staying invested in mutual funds via SIPs will also bring you the benefit of compounding, achieving the goal of long-term financial appreciation.
2. Maintain a diversified portfolio
Your ideal goal should be to maintain a diversified portfolio with assets in multiple asset classes. A diversified portfolio can lead to you boosting your portfolio returns by generating optimum risk-adjusted returns.
3. Think twice before redeeming your mutual fund investments
Millennials who are new to the world of mutual funds might start to panic at the initial investment stage when they do not witness an immediate profitability in the event of a market fall. However, it is important to note that there is always a recovery post the fall and market fluctuations are simply a part of the investment journey. This is why you need to avoid making a hasty decision that could bring a negative impact on your portfolio. During a market crisis, stay calm and avoid redeeming your investments in panic.
4. Conduct a periodic review of your investment portfolio
It is essential to review your investment portfolio on a regular basis to make the required adjustments with regards to your risk appetite, market movements, and financial goals. With this review, you will be able to adjust your investments based on the prevailing market conditions, which is crucial when you have a long-term investment approach.
5. Continue mutual fund SIPs even when the markets appear to be volatile
The markets can get volatile during inflationary pressures or geopolitical tensions. Now, immediately redeeming your investments based on colossal market volatility might not be an ideal move since premature exits could significantly impact your portfolio returns. Stopping your mutual fund SIPs when the markets are going through a turbulent time goes against the basic fundamentals of mutual fund SIPs, which are mainly meant for long-term investments.
To conclude, the earlier you start investing, the sooner you’ll be able to achieve your goals. Beginning your mutual fund investments early on can help in beating inflation and securing your financial future. With time on your side and the investment horizon going into decades, market volatility and other risks are brought down, with the return potentials being higher.