How Millennials Should Plan Their Investments for 2023

Planning your finances is not easy, whether you are just beginning your career or have been settling into one gradually. Amidst the hectic schedules of demanding jobs and the frantic frenzy of city life, you may often procrastinate on putting in place smart investment plans.

However, with growing awareness in recent times and after facing financial difficulties in the recent past due to unforeseen events like the pandemic. The necessity of having an investment plan in place has become increasingly clear to Millennials and Gen Z, and they are seeking to invest money into sound long-term investment avenues that will generate significant returns in the future. In addition, it will be prudent for millennials to concentrate on wise investment planning in the new year of 2023, given the persistent macroeconomic unpredictability, market volatility, and potential for recessionary risks.

So, how should you invest your hard-earned money? And What investment avenues should you consider to help your money grow consistently over time? It must be the questions arising in your mind. While plenty of investment tips are available, only smart investment strategies will ensure that your money does the work for you.

Being a millennial or from the tech-savvy generation, the world may be at your fingertips. Still, there is no denying that it has also led to an information overload in all aspects of life today, including personal finance decisions. Thus, it's important to be able to cut through the clutter and make informed navigation through robust investment planning. For today's Millennials, fintech has undoubtedly made finance more approachable and relatable. There are a number of mutual funds designed to give millennial investors the best starting point for building wealth.

How can smart investment in mutual funds help millennials achieve their financial goals?

In comparison to the older generation, millennials appear to be bigger risk-takers when it comes to investing in financial instruments. It is crucial for millennials to invest wisely because a high-to-medium risk instrument may not always generate high returns and vice versa.

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Mutual funds are considered to be lucrative financial instruments and are hence gaining popularity among Indian millennials. Investment in mutual funds assists in creating a solid investment portfolio and achieve a variety of financial goals. Mutual funds have made investment easy and affordable for everyone seeking to put their money to work. It offers various advantages as listed below:

• Ease of access through online investment platform

• Low investment amount of Rs 500 - Systematic Investment Plan (SIP)

• Power of compounding and rupee-cost averaging

• Portfolio diversification

• Tax-efficiency

• Significant returns in the long run

However, do note that each mutual fund category has different investment objectives and characteristics. Establishing your financial goals clearly is crucial before choosing your mutual fund strategy. This will help you determine the duration and amount required for investment and which scheme will suit your goals. One of the most important things to keep in mind when selecting a mutual fund to invest in is that they are exposed to market risks; thus, one should thoroughly analyse their risk appetite and financial goals before selecting a fund to invest in.

Millennials have the time factor on their side that they should leverage and get an early head start on their investments in worthy mutual funds. It is important for you to understand that starting early and remaining invested for the long term can help generate wealth by reaping the benefits of the power of compounding.

The market is swamped with countless mutual fund schemes. Picking the right mutual funds to park your money is crucial but can also be challenging. You need to ensure your mutual fund investments are aligned to your financial goals. You also need to allocate your funds proportionately into various asset classes like debt and equity and across market capitalisation to implement adequate portfolio diversification.

Let us take an example of some common goals of millennials and the most suited mutual fund options to invest in for these goals.

1. International Vacation or Buying a Car:  This could be considered as a short-term goal to be attained in 2-3 years. For such short-term goals, the best option would ideally be debt funds with an average maturity of the fund commensurate to the investment horizon, or a hybrid fund, depending on your risk tolerance. Debt funds like low-duration funds, short-duration funds etc., are suitable for these goals.

   In case your goal time frame is shorter, i.e., less than 1 year, then liquid funds and ultra-short duration funds are more appropriate investment choices.

2. Tax Savings:  Many millennials struggle with tax planning and are seeking to invest in effective tax-saving instruments that will reduce their tax liability. Section 80C of the Income Tax Act 1961 offers various tax deductions that reduce your tax obligations. However, it depends on how you invest in the tax-saving avenues that are eligible for deduction under the IT Act 1961.

   In order to save your taxes, you may consider investing in a mutual fund's Equity Linked Savings Scheme (ELSS) to claim a deduction from your taxable income u/s Section 80C of the Income Tax Act, up to Rs 1.5 lacs. Do note that ELSS funds carry a lock-in period of 3 years. Depending on your financial needs, you can invest for a medium (3 to 5 years) or long (more than 5 years) term; the longer your investment tenure, the higher can be the potential returns.

3. Retirement Planning: This is a long-term goal which is usually delayed by millennials considering it to be a task for later years. However, the earlier you plan for your retirement, the better it is, and it will help you build a wealthy corpus to fulfil your post-retirement needs.

   Equity mutual fund schemes are known to provide significant returns in the long run. Different types of diversified equity mutual funds, like large-cap funds, multi-cap funds, midcap funds, small-cap funds etc., are suitable. Depending on your risk appetite and investment horizon, you may consider investing in these schemes. If you are a conservative millennial investor, you may consider investing in traditional retirement avenues like PPF, NPS, SCSS etc.

4. Children's Education or Wedding Expenses: These are also considered long-term goals, but their time frames are usually shorter than retirement planning. Large-cap funds, index funds, hybrid funds (e.g., aggressive equity-oriented hybrid funds, Multi-asset allocation funds etc.), gold saving funds like Gold ETFs etc., are suitable. You may wish to move to debt funds as you get closer to your goals in order to reduce the risk.

To conclude...

There are several options under mutual funds that allow you enough flexibility to invest as per your needs. The crucial part of investing is making investment in the right mutual funds. Although being tech-savvy and having easy access to investing, millennials often find it challenging to select suitable mutual fund schemes that align with their financial goals. However, a thoughtfully constructed investment portfolio of the best suitable mutual funds linked to your goals can ensure success in achieving your financial objectives.

To achieve each goal within the given timeframe, you must estimate the amount of money needed, work backwards to establish how much you need to save each month, and decide where to invest. Therefore, you may consider PersonalFN's SMART Fund Explorer, which provides a list of the best suitable mutual fund schemes recommended by our research team.

PersonalFN's SMART Fund Explorer can help you plan your investments in mutual funds smartly to achieve your financial goals. You have to just follow these 4 simple steps:

Step #1 - Select the type of goal (buying a house, child's education, child's marriage, car, retirement, etc.).

Step #2 - Determine a suitable time frame for achieving these goals.

Step #3 - Insert the amount of money that you are willing to invest towards your goal.

Step #4 - Choose the type of investment (lumpsum or SIP).

PersonalFN's SMART Fund Explorer will draw the return expectation to reach your goal and two mutual fund investment options (A & B) which includes investment across asset classes and market cap. You may choose either of the options based on your risk profile.

So what are you waiting for? Click on the key to accomplishing your financial goals with PersonalFN's SMART Fund Explorer.

Do note once you start your investment journey, ensure you invest regularly and consistently. Track your investments and monitor their performances.

Happy Investing!

Warm Regards,
Mitali Dhoke
Research Analyst