Mutual funds help investors generate better inflation-adjusted returns while delivering consistent & higher returns
As the saying goes, ‘the early bird catches the worm,’ – the same holds true for investment earnings also. The earlier you start, the better are the chances of creating large financial wealth, as you get more returns for more time on your investments. Investing early can help you accomplish your financial goals in life comfortably. However, most individuals start investing when they are married or have kids, without comprehending that they are already late to the investing world.
Youngsters should always remember that ‘time’ is your greatest ally. Your investment capacity may not be significant when you start your profession, but this shouldn’t dissuade you from investing early. The first few years of investment at the start of your career can have a massive impact on your future wealth creation. Your twenties are actually the prime age to enter the investing world, even with college debt and low salaries.
The only thing certain in our lives is uncertainty. Whether it is your job or happenings in personal life, there may be situations where you will need money. Millennials should acknowledge the fact that the world economy has become more dynamic and connected to each other than before; a crisis in one part of the world impacts other countries and markets across the world. Inculcating the habit of investing can help you be better prepared to face these disruptions. To start planning your finances when you start your career can help you create a reserve and build a corpus. Mutual funds are a great investment option and can certainly bring in that discipline of financial planning.
A Case for Mutual Funds
An encouraging trend is being observed across the country where millennials are searching for appropriate investment opportunities, and are investing in a planned and organised manner. Young investors these days are beginning their profession with attractive earnings, whether they are in job or business; they have high aspirations and are continuously looking for means to enhance their lifestyle, both in present and in future.
Catch them young, watch them grow—if you are starting young, equity funds should constitute around 80 per cent of your portfolio, as this asset class has established itself to be the best bet for growing money over the long term. The earlier you ‘get in,’ the greater the return you’re likely to witness on the money you invest; and mutual funds are the best way to enter into this asset class.
Why should millennials consider mutual funds over other asset class to achieve their investment goals? Mutual funds allow investors to pool in their money for a diversified selection of shares/ securities, managed by professional and experienced fund managers and help mitigate risks to a large extent by distributing investment across a diverse range of assets. Mutual funds also help investors to generate better inflation-adjusted returns, without spending a lot of time and energy on it, while delivering consistent and higher returns over a period of time. They are also tax efficient.
Equities – The Best Performing Asset Class
Is equity the best performing asset class in the long term? Let's look at some history. Assume you had invested Rs 1 lakh each in fixed deposits, gold, and Sensex in 1979-80-the year when the benchmark index Sensex came into existence with a base as 100. If you had kept your investments till 2017, the approximate return of various asset classes during the last 37 years has multiplied fixed deposits wealth by 22 times, gold by 32 times, and Sensex by whopping 320 times.
Although it is never too late to start investing, starting late will reduce your ability to create substantial wealth. Let's look at these through a very common example - three friends of the same age (say 40), working in different companies with earning level more or less same. The first one is investing Rs 5000 monthly in a mutual fund SIP from the time he started his job, say for the last 15 years; the second is investing in a mutual fund SIP of Rs 5,000 per month for last 7 years; and the third, a spendthrift, is investing in a monthly SIP of Rs 5,000, only for last 3 years. Let's assume an average market return of 16 per cent.
In this scenario, the first one is the winner by accumulating Rs 36.5 lakh, simply because he started investing as soon as he started working, 15 years back. Whereas the second friend managed to garner only Rs 8.5 lakh over a period of 7 years, and third Rs 3 lakh in 3 years; such is the power of compounding returns.
Investing in systematic investment plan or SIP of a mutual fund scheme is best advised for accomplishing financial goals over a period of time, because when an investor attempts to time the market, he usually misses out on the rally or enters the market at the wrong time-either the valuations have peaked or the markets are on the verge of declining. Investing every month ensures that one is invested during the peaks and valleys of the market. SIP allows you to invest small amounts of money and build a larger corpus over a period of time; it also brings discipline to investing and ensures building of a good investing habit.
Wealth is created if one invests early and stays longer. The real advantage benefitting an early investment is compounding returns - the ability to grow an investment by reinvesting the earnings. Albert Einstein referred to compounding returns as 'the eighth wonder of the world.' The magic of compounding allows investors to generate wealth over a period of time, and requires only two things - reinvestment of earnings and time. Hence, millennials who are aiming to achieve their investment goals of life should consider mutual funds, and start investing early.
D P Singh
ED & CMO, SBI Mutual Fund