SIPs for Millennials: Smart Investing Tips & Benefits

Systematic Investment Plans (SIPs) offer an accessible entry point into the world of investing. By allowing individuals to invest small, regular amounts in mutual funds, SIPs can cater to varying income levels of millennials. The flexibility to increase, decrease, or stop SIPs can also help adapt investment strategies to life circumstances.

These factors can make SIPs especially suitable for millennials. As incomes rise, expenses evolve and life circumstances change in your 30s and 40s, an SIP can give your investment strategy the adaptability it needs. Moreover, at a time when financial commitments may be rising, SIPs allow affordable investing. Lastly, as investment horizons can be on the longer side in this period, your investments can benefit from the power of compounding to optimise return potential.

To make the most of your investments, it is important to keep a few things in mind. Here’s a list of tips that millennials can consider when opting for SIP to invest in mutual funds.

• Table of contents

1. Key Investment Objectives for Millennials Using SIPs
2. Evaluating Risk Tolerance and Liquidity Needs for SIPs
3. Shortlist mutual fund schemes
4. Gradually Increasing SIP Contributions for Optimal Growth
5. The Power of Starting Early with SIPs
6. Avoid falling into the debt trap
7. Distinguish between short-term and long-term investments

Key investment objectives for millennials using SIPs

It is important for millennials to establish their investment objectives before starting a SIP investment. Here are a few possible investment objectives for those in their 30s and 40s may typically be saving for:

• Retirement planning: Starting early with SIPs can help millennials build a substantial retirement corpus, leveraging the power of compounding for a comfortable and secure future. Compounding happens if the returns on an investment, when reinvested, go on to earn further returns. As this cycle continues, if the investment base steadily grows, compounding can potentially lead to significant growth over time. The pace of compounding picks up with time, so the longer the investment horizon, the greater the potential effect of compounding.
• Emergency fund creation: SIPs offer a disciplined approach to gradually building a safety net for unexpected expenses, providing financial stability.
• Medium and long-term goals: SIPs provide a systematic approach to growing wealth over time, which is essential for achieving long-term financial goals such as buying a house or funding higher education.
• Wealth accumulation: You may want to build wealth over time for increased financial security or to create an inheritance for your children. Once again, a long investment horizon and the power of compounding can work in your favour.

Evaluating risk tolerance and liquidity needs

It is essential to consider the amount of risk you can tolerate when investing. It is also important to know whether you need access to your funds (i.e. liquidity).  Here are some more details:

• Liquidity needs: Assess your need for liquidity when choosing a mutual fund. If immediate liquidity is required, consider overnight or liquid mutual funds, which are meant for short-term investing and typically offer convenient access to funds. Open-ended equity schemes may also offer liquidity, but it is recommended to stay invested for the long term to optimise return potential. Also, avoid funds with a lock-in period.
• Risk appetite: Thoroughly assess your risk tolerance before making any investment. Understanding your risk appetite will help you select mutual fund schemes that suit your comfort level, making the investment experience smoother. Conservative investors may prefer debt mutual funds, while those comfortable with risk and with a long investment horizon may consider equity-oriented schemes. Investors who want an optimised risk-return balance may consider hybrid funds that invest in debt as well as equity.

Shortlist mutual fund schemes

Once you’ve determined your goal and risk tolerance, you can start identifying mutual fund schemes. Here are the factors to consider for this process:

• Identify the fund type: Based on the factors listed above, select the right mutual fund category for your risk appetite and time horizon – equity, debt or hybrid. Within these broad categories too, there are several funds. Again, your investment horizon and risk appetite will influence your choice.
• Consider tax efficiency: The taxation rules for equity-oriented and debt-oriented funds are different.
• Use an SIP calculator: An SIP calculator can help you determine what type of scheme may be suitable for you given your desired corpus. Using this free online tool, you can input your investment amount and expected return rate. For this, you can use the average historical returns of the scheme category you are considering. This can provide a ballpark but do note that past performance may or may not be sustained in the future. Consider the past returns over different time periods and market cycles for a better estimate. The calculator can also help you identify the right investment amount to potentially get you to your goals.
• Consider tax efficiency: Additionally, consider the scheme’s tax efficiency. Debt mutual funds may attract higher taxes than equity schemes.

Gradually increasing SIP contributions for optimal growth

Increasing your SIP instalments over time to match rising incomes can optimise return potential.

• Initial investment: To start, choose an amount that is affordable for you. This will allow you to invest regularly without resulting in financial strain.
• Incremental increase: As your income increases, gradually raise your SIP contributions. This strategy enables your investments to grow over time, resulting in significant growth.
• Long-term growth: Finally, by progressively increasing your contributions, you can maximize the advantages of compounding. In the long run, this could lead to substantial wealth accumulation. This method makes investing more manageable and helps you build a secure financial future.

The power of starting early with SIPs

The earlier you start your investment journey, the more you can optimise your wealth potential. Here are some reasons why:

• Maximised compounding benefits: Beginning your investments early enables you to tap into the power of compounding, allowing you to earn returns on both your initial investment and the accumulated interest over time.
• Small savings grow big: Even small, regular investments can accumulate significant wealth due to the compounding effect. Investing just 5-10% of your income early can lead to substantial growth over the years.
• Impact of compound interest: Compound interest allows your investments to grow exponentially. The longer your money is invested, the more it can multiply, significantly impacting your long-term financial success.
• Early start advantage: Starting early gives your investments more time to grow, resulting in significant wealth accumulation over time. Early investments effectively harness the power of compound interest.

Avoid falling into the debt trap

Millennials may be tempted to take loans for expensive items instead of saving up. While EMIs can seem affordable, they can lead to significant debt if not managed properly. Here are key tips to help you avoid falling into a debt trap:

• Resist the temptation to buy unnecessary items: Avoid buying unnecessary items on credit. While repaying loans with EMIs may seem affordable, the high interest rates can lead to mounting debt over time.
• Be cautious with credit card usage: Be mindful of how you use your credit cards for everyday expenses. Excessive credit card usage can quickly lead to debt, so manage your balance carefully and avoid unnecessary charges.
• Invest instead of spending: Consider investing your money instead of using it for EMIs on non-essential items. For example, putting the amount you would spend on a gadget into a Systematic Investment Plan (SIP) can result in better financial growth over time.
• Build an emergency fund: Build an emergency fund comprising savings equal to six months of your income. This financial safety net helps you handle unexpected expenses without falling into debt.

Distinguish between short-term and long-term investments

It is important to differentiate between short-term and long-term investments for effective financial planning. Mixing up the two, or using the same type of funds for both, can lead to sub-optimal investment outcomes. Here's why it is important to keep them separate:

• Short-term investments for immediate goals: Short-term investments, like short-duration debt funds, are more suitable than equity funds for meeting near-term objectives or for an emergency reserve because relative stability of capital is important for these goals.
• Long-term investments for future goals: Equity-oriented mutual funds are better suited for long-term goals because of their potential to offer inflation-beating returns and wealth accumulation in the long run.

Conclusion

SIPs can be a suitable way for millennials to invest for their future as well as for short-term goals. Having clear objectives, assessing your risk appetite, starting early and implemented a disciplined strategy can help potentially you have a satisfactory investment journey.

FAQ

What is the minimum investment required for mutual fund?

The minimum investment for mutual funds can differ from one scheme to another and one asset management company to other. It can start at as low as Rs 100 to Rs 500, making it accessible to most investors. This low entry point allows millennials who are relatively early on in their career to begin investing with a modest amount.

Are mutual funds risky investments?

All mutual funds are subject to market risk, but schemes have different levels of risk depending. Debt mutual funds are usually less risky than equity mutual funds. To manage risks effectively, it's important to diversify across debt and equity, choose a long investment horizon for more risky schemes. It is also essential to assess your risk appetite before investing to choose a suitable scheme.

Can millennials invest in mutual funds online?

Yes, most asset management companies allow online investing. There are several aggregator platforms too.
You can use sip or compound interest calculator to estimate the returns on your investments.

Why should millennials consider investing in mutual funds?

Millennials should consider investing in mutual funds to build wealth over time, benefit from professional management and work towards their financial goals. Mutual funds provide a structured approach to investing and can help with both short-term and long-term objectives.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.