Investing during the early years of life can prove to be very beneficial because there is ample time and many opportunities for young investors to invest. Although some people may think it’s too early to think about retirement in their late teens or early 20s, it’s actually much better to start managing finances at an early age by saving and investing so that you can have fruitful results of compounding over the years. It’s never too late to start investing. Mutual funds are an excellent option for young investors who have a low-risk appetite and a low initial investment budget. This blog post is for young investors explaining why they should invest in mutual funds to reap big in the future.
Table of Contents
Defining Mutual Funds
- Mutual funds are a type of investment where investors pool their money together to invest in assets such as equities, derivatives, money market instruments, or other securities. The objective is to achieve a common investment goal.
- The money collected is managed by professional fund managers who invest in securities based on the scheme’s investment objectives.
- This investment option is suitable for individuals who prefer low-risk investments and have limited capital to invest but still want to achieve their financial goals without conducting extensive market research. Therefore, it is an ideal and safer investment option, especially for young investors.
6 Reasons Mutual Funds Are a Smart Start for Young Investors
For novice investors who are just starting, mutual fund investments are an intelligent and prudent choice. With their diversified portfolio, professional management, and relatively low risk, mutual funds provide an excellent foundation for young investors to begin their investment journey.
The Magic of Compounding
Compounding is one of the most desirable advantages of investing in mutual funds. By starting early, investors can reinvest in their portfolios for the long term. This compounding effect helps investors in achieving their financial objectives.
Professional Expertise
Investors can take the help of intermediaries and experts during their investment journey. These experts may include mutual fund distributors and full-time professional fund managers who offer professional advice to their clients on selecting suitable mutual fund schemes for their financial objectives. Fund managers utilise their expertise to manage investments efficiently in this dynamic financial market and help the fund achieve its stated objectives.
Tax Benefits
The Equity Linked Saving Scheme (ELSS) is a type of mutual fund that offers tax deduction benefits under Section 80C of the Income Tax Act. This scheme is ideal for individuals looking for long-term investment opportunities with tax deductions under the IT Act. However, not all mutual fund schemes provide tax benefits, and it is crucial to have a good understanding of tax regulations to ensure compliance.
Financial Discipline
Investing, in general, helps investors develop a sense of financial discipline. Young investors have the advantage of making mistakes and learning from them over time, which allows them to become better and more resourceful investors. Young investors should create a solid financial plan and commit to investing smaller amounts regularly to develop healthy investing habits.
Diversification Made Easy
Mutual funds offer a built-in diversification system, which means that investing in a single scheme enables diversification. Professional fund managers invest in a basket of investments in various sectors and assets on behalf of the investors. Therefore, young investors need not worry about being amateurs in the field of investing.
Improving Risk Appetite
Every investor must assess their risk appetite and invest accordingly. Young investors usually have a higher risk appetite than their older counterparts. Some young investors have fewer financial responsibilities, which makes them flexible in changing their financial goals. As one grows older, financial responsibilities increase, making them conservative. Therefore, mutual funds are ideal for young investors to diversify their investments based on their risk tolerance.
Types of Mutual Funds to Consider
There are several types of mutual funds that vary based on their asset class, risk exposure, structure, and investment goals. Investors need to conduct extensive research before selecting funds that align with their preferences and risk tolerance. To help young investors start their financial planning, below is a list of mutual funds they may consider.
Large-Cap Funds
Large-cap funds invest in the securities of well-established and dominant companies with large capitalisation in their respective industries. Benefits of investing in large-cap funds include:
- Lower risk exposure as compared to mid-cap and small-cap funds
- Suitable for long-term investors
- Benefit of compounding
Money Market Funds
Money market funds include investments in money market instruments such as treasury bills (T-bills) and certificates of deposit issued by banks and other financial institutions. Its benefits include:
- Suitable for short-term investors (12 to 13 months)
- Carries lower risk
- A secure form of investment
Tax Saving Funds
- Equity-Linked Saving Scheme Funds (ELSS) are also known as tax-saving funds. These funds are suitable for those who want long-term investment opportunities with the option of tax benefits.
- Gains on these funds are fully exempt from tax upto ₹1 lakh in one financial year under Section 80C of the Income Tax Act. The IT Act allows for tax deductions upto ₹1.5 lakhs for investment in ELSS funds.
Liquid Funds
- Liquid funds can serve as a savings option for investors. They involve investing in short-term debt and money market instruments with a tenure of no more than 91 days.
- These funds differ from debt funds based on how their Net Asset Value (NAV) is calculated.
- Rather than keeping surplus money in a savings account, these funds are an ideal option for investing while minimising risk.
Conclusion
Young investors have an excellent opportunity to turn their savings into fruitful investments at an early age. Mutual funds are an excellent option for them to develop healthy financial habits and start investing in their early adulthood. For young beginner investors, Share India offers a free Demat account to help them explore the world of investing. With just four simple steps, you can open your Demat account and have complete control of all your investments in one secure digital platform.
