How Millennials Should Go About Building a Mutual Fund Portfolio

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Millennials, Gen Y, the internet generation — people born in the 1980s and 1990s—–are characterised as tech-savvy, ambitious, well-educated and liberal. They aspire to follow their own dream, build wealth, and travel around the world and are even willing to take a sabbatical to pursue their aspirations. This is one generation that can never have enough.

Most of these aspirations, if realistic, can be achieved through proper financial planning. The many investment options available include bank deposits, Small Saving Schemes (SSS), Public Provident Fund (PPF) and mutual funds. Though bank deposits, SSS and PPF are considered safer avenues, the wealth building potential is fairly limited.

Mutual funds, on the other hand, have the potential to give higher returns over time and thereby counter inflation. One can design and build a mutual fund portfolio as per their financial goals and needs after taking into account your risk appetite and the investment time horizon.

[Read: Are Mutual Funds An Answer To All Your Financial Goals?]

Millennials constitute almost half of the working population in India today. As millennials are currently in the age group of 20-40, they can afford to undertake riskier investments and stay invested for longer.

Therefore, their investment portfolio should have a larger exposure to equity instruments. Debt and money market schemes should be included in the portfolio to diversify the risk and provide a cushion during market volatility. As the time horizon decreases, the equity portion should be lowered, and the debt portion should gradually increase after doing a thorough review.

Though millennials have easy access to information through the internet, there seems to be a lack of understanding about various mutual fund schemes. They tend to follow the advice of their friends, family, or colleagues when it comes to investing. Or else, as is the case with everything else that they purchase, they prefer to buy funds online looking at the star rating.

[Read: Seven Mistakes To Avoid While Investing Online In Mutual Funds]

Star ratings are based on the past performance of a fund. While it can be a starting point to shortlist funds, you cannot base your investment decision merely looking at star rating; because they are no way indicative of the future performance. In fact, after the capital market regulator’s categorisation and rationalisation norms for mutual funds, you should stop looking at star ratings.

Instead, to build a SOLID mutual fund portfolio, millennials and everyone should first consider their age, financial health, risk profile, liquidity needs, investment objective, financial goals, and the time horizon to achieve the envisioned goals, so as to allocate assets prudently.

Thereafter, to add mutual fund schemes to the portfolio dig deeper and evaluate a mutual fund scheme based on various quantitative and qualitative parameters, so as to select only the worthy ones.

Watch this video:

Here’s how millennials with dependents and those without dependents can build their mutual fund portfolio…

Without Dependents

For those in the age group of early and mid-20s, who are unmarried and whose parents are not dependent on them for financial needs; you may have recently started earning and possibly a novice investor. Therefore, first, make a point to save and invest regularly by following a strict budget.

[Read: 5 Steps to Build a Perfect Personal Finance Budget]

Even though your income may not be high at this point, you can start saving a small amount every month and invest via Systematic Investment Plan (SIP) of mutual fund and keep increasing your SIP investments as and when your income increases.

At this point, you may have certain short-term to medium-term goals like building an emergency corpus, buying a vehicle, international vacation, etc. apart from some mandatory long-term goals viz. higher education, wedding expenses (if you are planning to get married in the future), your retirement, and so on.

For long-term goals like retirement, if you want to build a substantial corpus, then as soon as you start earning start investing a major proportion in equity mutual fund schemes.

For other short to medium-term goals, you may park your money in liquid funds and/or overnight funds.

Table 1: Allocation between equity and debt for different investment horizons
(For investors without dependent members)

Years to goal Equity allocation (%) Debt allocation (%) Type of funds
More than 10 80-90 10-20
5-10 60-75 25-40
  • Large-cap
  • Large & Mid-cap
  • Mid-cap
  • Multi-cap
  • Balanced/Aggressive Hybrid
  • Medium/Long Duration
  • Dynamic Bond
  • Corporate Bond
3-5 40-60 40-60
  • Large-cap
  • Balanced/Aggressive Hybrid
  • Liquid/Overnight
  • Dynamic Bond
  • Corporate Bond
  • Short Duration

(Note: This table is for illustration purpose only. Please speak to your investment advisor
for further assistance before investing.)

With Dependents

If your family members are dependent on you for financial needs, that could weigh on your risk-taking ability. It could be lower than someone without any dependents, as you have more responsibilities to shoulder. Dependents may include spouse, children, and parents.

Risk appetite would also lessen as you age.

If you’re a double income family, your spouse and you could invest and create a bigger corpus for the future. Your long-term goals will increase at this stage, especially if you have children.

You need to rationally view your equity exposure and even consider debt and money market options. Gold in the form of gold ETFs/mutual funds can benefit your portfolio for security and diversification purposes.

The allocation towards equities can be kept high as long as you have many long-term goals such as buying a house, children’s education/marriage, retirement, etc. to address. For short-to-medium-term goals such as annual vacation, building an emergency corpus, money can be parked in short-term debt funds, liquid funds and overnight funds.

Also, when you have dependent, it is also important to optimally insure yourself for life and health to safeguard the financial interest of your family.

Table 2: Allocation between equity and debt for different investment horizons
(For investors with dependent members)

Years to goal Equity allocation (%) Debt allocation (%) Gold% Type of funds
More than 10 75-80 15-25 5
5-10 60-75 25-40 5-10
  • Large cap
  • Large & Mid-cap
  • Mid-cap
  • Multi-cap
  • Balanced/Aggressive Hybrid
  • Medium/Long Duration
  • Dynamic Bond
  • Corporate Bond
3-5 40-60 40-60 0-5
  • Large cap
  • Balanced/Aggressive Hybrid
  • Liquid/Overnight
  • Dynamic Bond
  • Corporate Bond
  • Short Duration

(Note: This table is for illustrative purpose only. Please speak to your investment advisor
for further assistance before investing.)

The key factor to achieve your envisioned financial goals is selecting the right mutual fund schemes for your portfolio. Avail the services of an independent and unbiased investment adviser who can guide you to build your mutual fund portfolio and handhold you in the journey of wealth creation.

If you invest wisely and SMART-ly to build a mutual fund portfolio, you can make your dreams come true.

Editor’s note:

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Happy Investing!

Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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