Mutual Funds for Young Investors
Warren Buffet once said, “do not save what is left after spending; instead spend what is left after saving.” This quote emphasised prioritising savings in our financial lives. However, a lot of modern day youngsters prefer doing precisely the opposite – living in the present and spending on luxuries rather than focusing on the saving for the future.
Managing finances is a habit, which must be cultivated at a young age, as soon as you start working. The earlier you learn the skill, the better it is for the future. It is only natural that as you go through different stages of life, your responsibility also increases; you would have to take care of your spouse, children, education etc. As such, the young investors must be made to learn the art of saving and then investing the savings in the right investment products, so that the savings not only accumulate but also continue to grow over a period.
One may think that there is a long time left in their retirement, and as such, there is no need to save presently. However, starting early tends to get better returns on investments as they grow due to the power of compounding. Compounding refers to the returns generated by the existing returns that have been reinvested into the investment portfolio. As such, the earlier you start saving and investing, the larger retirement corpus you would be able to accumulate.
For example, if you start investing Rs. 20,000 every month towards your retirement goals at the age of 25, you would have accumulated an investment portfolio of Rs. 12.99 crores by your retirement, assuming your investments generate 12% annualized returns. However, if you start making regular investments at the age of 35 years, the retirement corpus will be only Rs. 3.80 crores by your retirement, considering other things remaining constant. As such, delaying investing for 10 years may reduce your portfolio by around 70% by around Rs. 9.19 crores.
It is paramount to realize the fact that the returns on your investments grow exponentially as you allow more time to your investments. Continuing with the above example, the portfolio grows by Rs. 9.19 crores, even while the investment over the additional 10 years of investment is only Rs. 24 lakhs. The extra 10 years of investment is what has made that difference and this is precisely is the power of compounding. Starting early also helps you to eliminate the timing risk, as the market timing may not impact the portfolio returns to a large extent.
Systematic Investment Plans (SIPs) provide an investment option to the investors to invest regularly in mutual funds, wherein the investor has the flexibility in respect of amount and the period of the investment. As the adage goes, ‘small drops of water make an ocean’, regular investments, even if small, may not be making much difference in the short run but add much more value to the investment in the long run.
Given that the young investors have a longer duration towards accomplishing their financial goals, including retirement planning, here is a list of different mutual funds for young investors wherein they may invest their funds:
Large Cap Funds – A large-cap fund, commonly referred to as bluechip fund, will invest predominantly in equity and equity related instruments of large-cap companies. With their resilience to withstand market volatility, large-cap funds may serve as a strong foundation for a long-term portfolio.
Value Funds – Such funds follow a value investment strategy. In other words, they invest in stocks that are relatively cheaper in valuations and reflect a higher potential of growth owing to their inexpensive valuations compared to their fundamentals. As such, the investors may reap great benefits from such funds over the long term.
Multi-Cap Funds – Such funds enjoy the flexibility to invest across companies with varying market capitalizations. As such, the fund manager enjoys the flexibility to invest across the companies wherever he finds an investing opportunity with a potential for growth and higher returns.
Liquid Fund – It is always prudent to maintain an emergency corpus equivalent to six months’ expenses, for it provides the necessary financial cushion in case of job changes and other financial exigencies. Investing such emergency funds in liquid funds allows the investors to generate better returns than the traditional investment products while maintaining almost similar liquidity.
Starting to invest early is taking the right step towards a healthy financial future. Make sure, you take that step in the right direction.