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Investing for Millenials

05 Jan 2023

India today stands at a pedestal when it comes to demographic advantage, beating major geographies of the world. Half of our country’s population hasn’t placed 25 candles on their birthday cake yet. Our country is slated to be the youngest by 2020 with an average age of 29 years (37 for China, 48 for Japan), as per the projections of United Nations.

A bulk of the current workforce pyramid is also formed by the millennials, who are essentially those born between early 1980s and 2000. Being the ones attaining highest educational qualifications of all generations so far and the first ones to tap their fingers on computers, their habits are tad different from the Generation X.

Since their education aspirations have been high, they are encumbered with immense student loans and even unemployment in select economies facing the wrath of recession. Author and Economist Jeremy Rifkin, righty refers to them as the renter generation pointing, “25 years from now, car sharing will be the norm, and car ownership an anomaly.” Though a small set of millennials are also the youngest billionaires (born in 1984 Mark Zuckerberg and Dustin Moskovitz founders of Facebook), but many others rue about unmet career expectations and low satisfaction as they are seeking work-life balance.

In terms of social behaviour they crave to be connected through social media, smartphones and the latest technology, including tracking health through wearables and opt for texts, emails and videoconferences vs. personal meetings. Needless to say millennials seek an integrated, seamless experience regardless of the channel.

But even as the current set of octogenarians in the country switched from telegrams to public and later private telephones and aging parents evolved to pagers and cellphones, while the youth took to smart phones and internet telephony, the investment habits are still stuck in the telegram era.

Nearly half of the country’s annual household savings – 47% to be precise – are invested in fixed deposits as per the RBI Annual Report 2015-16. Though the bank FD pie is shrinking, the numbers aren’t proportionate with the steep fall in interest rates from 14.5% in 2000 to 6.5% currently.

Financial Assets held by Indian Households

Year

Currency

Bank Deposits

Non-banking deposits

Life Insurance Funds

Provident Fund and Pension Funds

Share and Debentures

2012-13

10.9

56.1

1.7

17.8

12.1

4.3

2013-14

8

60.5

2.4

16

10.6

2.5

2014-15

10.7

46.9

2.2

19

16.3

4.6

Source: RBI Annual Report 2015-16

 

The socially-active generation has steeply enhanced monthly spends compared with other generations as they embellish their own life bogging down to peer pressure where everyone is telling you about their foreign vacations, parties et al. Hence, mirroring the investment recipe followed by forefathers could prove to be a disaster for the millennials, who have fewer responsibilities, high disposable income and a longer investment horizon for prime goals such as marriage, retirement.

My piece of advice to the Millenials:

Playing the conservative investment card could leave them dry. To cite an example, PPF currently offers 8%, while the average Consumer Price Index (CPI) inflation for the calendar year 2016 was 5.1%. The net return thus works out to a meager 2.9%. To ensure they don’t outlive their savings and leave goals unfulfilled, an edge of equity is required. Over the past 10 years, equity has been the top performing asset class offering five times average returns of 13.7% vis-à-vis 7.66% clocked by short-term debt and 8.03% offered by long-term debt instruments. From 1979 to 2006, Sensex has risen 100x from 100 to 10,000. Further between 2006 to 2016, Sensex has grown from 10,000 to 28,000 giving a CAGR return of 17% post tax (since there is no long term tax on capital gains). Based on our estimates Sensex is expected to scale up 1000x times of the base value by the end of the FY 2025-26.

Wondering what difference a difference of 5.5% can make? Read on.

Siblings Sachit and Archit opt for different modes to save. While Sachit opts for traditional PPF, Archit goes for tax-saving mutual funds. The difference after 15 years of investing similar amount of Rs 1.5 lakh annually in both is that Sachit had saved Rs 29 lakh in his PPF account while Archit’s savings catapulted to Rs 61 lakh through tax-saving mutual funds. Archit also isn’t restricted by the 15-year lock-in that Sachit faces in PPF as his funds have the lowest lock-in of three years.

Hence, millennials should consider age-appropriate diversified asset spread including equity for long-term goals, debt for emergency funds and liquid assets and a limited exposure to real-estate and gold. An ideal mix for those in 20s would be an aggressive 85-100% in equities, 15% debt and 5% in gold or alternate investment seeking higher growth during the early years. As they age, they can taper down the proportion of equity over the years to reach 65-85% equity, 35-15% debt between 45 to 60 years to preserve the savings and finally 0-35% equity against 65-100% debt during the retirement period as they withdraw for monthly needs.

While millennials keep shuffling jobs in search for greener pastures, the strategy wouldn’t work best when it comes to equity. As equity investments have a tendency to reduce volatility when held for a longer-time frame. As seen in the table, the minimum returns improve and volatility plummets when stocks or equivalent investments are held for a longer duration.

Period

3 yr

5 yr

7 yr

10 yr

Minimum Return

-11

1

7

10

Volatility

21

15

9

5

Average Return

25

22

20

21

Source: CRISIL

 

Long-term savings can be parked in stocks and equity-linked mutual funds. The risk-averse can consider a mix of equity and debt instead of shunning equities completely. A new retirement planning option of New Pension Scheme (NPS) has emerged where one can now invest upto 75% in equity (upto a certain age) and opt for auto reduction in the equity exposure as one nears retirement. This can be explored instead of PPF as it also offers additional tax benefit on income upto Rs 50,000.

One difference though is that the maturity of NPS isn’t completely tax-free like PPF in the current form. An annuity, which is a plan that offers regular pension needs to be opted for. There are options of balanced funds investing in debt and equity, which can be explored.

For those who are not too comfortable with long term investing, their money can be put to better work in liquid funds offered by mutual funds, that have offered a return of 8-9.4% over the past year, as on January 18, 2016 instead of keeping this money idle in savings account earning a measly 4% (6% for higher sum). These funds don’t even have a lock-in and few funds also offer instant redemption within 30 minutes to 24 hours. The tech-savy youth can also use rated apps offered by reliable providers to invest in liquid and money market funds.

As millennials are strongly influencing decisions of their parents, it is time to nudge them to move out of the safe zone investing and handhold them to the world of smart investing. 

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