5 Crucial Investment Questions Answered for Millennials

Key Takeaways:

1. Starting to save for retirement early allows individuals to benefit from the power of compounding, leading to substantial growth in savings over time.

2. Every asset class, including equities and debt, carries its own set of risks, and understanding the nature of these risks is crucial before linking them to specific financial goals.

3. Before starting mutual fund SIPs, it’s essential to put a comprehensive financial plan in place, choose the right scheme based on goals and risk profile, and ensure proper diversification across fund houses and asset classes.

4. Beginners looking to invest in equities may consider starting with index funds or actively managed diversified large-cap schemes, while evaluating their risk appetite and understanding the market and asset classes.

5. Planning for a child’s future needs, such as education and marriage, should involve identifying and estimating the child’s goals with different time horizons, starting to save towards them, and ensuring that risks are taken care of before investing.

5 Investment and Financial Planning Questions Answered for Millennials

Millennials, born between 1980 and 1995, are increasingly recognizing the importance of investing and financial planning. Here are 5 important investment questions and their answers for millennials.

1. Why do I need to start saving for retirement so early?

Saving for retirement early in life is crucial for several reasons. One of the most compelling reasons is the power of compounding. By starting to save early for retirement, individuals can benefit from the compounding effect, where the interest on their savings earns interest, leading to exponential growth over time. For example, if Rs 10,000 per month is saved for 20 years, it could grow to roughly Rs 1 crore (assuming a 12% CAGR). In 30 years, the accumulated amount would be closer to Rs 3.5 crore. Additionally, the 30:30 rule of retirement emphasizes that 30 years of earning period should support the 30 years of the non-earning period, considering the increasing life expectancy.

2. Is there any risk in not investing in equities?

Every asset class, including equities and debt, carries its own set of risks. Even the safest investments backed by a sovereign guarantee carry the risk of losing purchasing power on the income earned. While equities are prone to volatility, studies have shown that they have the potential to deliver higher inflation-adjusted returns over the long term compared to other asset classes. It’s important to understand the nature of the risk and its impact on earnings before linking it to specific financial goals.

3. I got my first paycheck; should I start mutual fund SIPs?

Before starting mutual fund SIPs, it’s essential to put a financial plan in place with all its elements. SIPs (Systematic Investment Plans) instill discipline and help in saving for long-term goals by diverting a fixed amount from monthly paychecks. However, it’s crucial to choose the right scheme based on goals and risk profile, estimate inflation-adjusted requirements for short-medium-long term goals, and identify consistently performing MF schemes accordingly for various time horizons. Diversification across fund houses, asset classes, market capitalization, industries, and investment style is also important.

4. I am 30 and saving in bank FDs; I want to invest aggressively in equity shares and MFs. How to go about it?

For beginners looking to invest in equities, considering investing in an index fund or actively managed diversified large-cap schemes may be a good starting point. It’s important to evaluate one’s risk appetite, understand how the market and asset classes work, and have a clear approach towards investing before making a start.

5. We were recently blessed with a child. How should I go about planning our financial life?

As one’s family grows, so do the financial obligations. Planning for a child’s future needs, such as education and marriage, is crucial. It’s important to identify and estimate the child’s goals with different time horizons, start saving towards them, and ensure that risks are taken care of before investing.

FAQ

Q1: Why is it important to start saving for retirement early?

A1: Starting to save for retirement early allows individuals to benefit from the power of compounding, leading to substantial growth in savings over time. Additionally, with increasing life expectancy, the non-earning period in an individual’s life is increasing, making it crucial to make provisions for retirement as early as possible.

Q2: Is there any risk in not investing in equities?

A2: Every asset class carries its own set of risks, and understanding the nature of these risks is crucial before linking them to specific financial goals. While equities are prone to volatility, studies have shown that they have the potential to deliver higher inflation-adjusted returns over the long term compared to other asset classes.

Q3: How should I go about planning our financial life after having a child?

A3: Planning for a child’s future needs, such as education and marriage, should involve identifying and estimating the child’s goals with different time horizons, starting to save towards them, and ensuring that risks are taken care of before investing.