Where and how do millennials invest?

Have you ever wondered how and where the millennials invest? Let's take a look at their investment thought process.

Where and how do millennials invest?

Millennials represent nearly half of India’s population and are a crucial target group when it comes to investing. While millennials are a lot more tech-savvy and in tune with various investment options, where and how much they invest can vary depending on their age and income bracket.

Though millennials constitute about 47% of the Indian workforce, they are a diverse group. Those born between 1981 and 1989 are referred to as ‘older millennials’, while those born between 1990 and 1996 are considered ‘younger millennials’.

A large number of older millennials entered the job market close to the 2008 global recession, so they tend to have a balanced investment style. Most of them are now aged 30+ and tend to prioritise family and financial security. They are in a good place in terms of their careers, have a high disposable income, and tend to have a portfolio that is a lot more diverse than their younger counterparts.

The younger millennials have completed 3–7 years in their professional life and have just started to get serious about their savings. They are digital natives, prefer self-directed investment options, and tend to have an aggressive investment approach. They display higher trust in technology and would not work exclusively with an advisor, considering the advisory costs and entry-level affluence required to access such a service.

Related: How do millennials spend their money?

Where do millennials invest?

Equity

Access to online platforms, expert knowledge, analysis, and tools have driven greater transparency for equity investments. Over the long term, those looking to make investments with high returns cannot afford to ignore the stock markets. Older millennials tend to make greater direct equity investments, even though affluence rather than age seems to determine how much is invested in direct equity. The richer millennials invest almost twice as much, indicating that higher earnings provide a cushion that allows people to bear more risk.

Mutual funds

Mutual funds are the go-to investment option for millennials, irrespective of age or income. The ease of investing, variety of funds, and professional management make mutual funds extremely attractive. Most millennials tend to start the mutual fund journey through tax-free investments in an Equity Linked Savings Scheme (ELSS). For younger millennials, the lack of other tax-saving avenues and commitments such as home loans, child’s education loan, etc. make ELSS the most preferred tax-saving option.

Among debt funds, there is a preference for liquid funds that offer insta-redemption. Not only do these funds offer liquidity in times of crisis, but they are also sound portfolio diversifiers and cater to the small risk-averse sub-segment among millennials. According to a survey, about 85% of millennials in India have a mutual fund investment primarily through systematic investment plans (SIPs). 

Overall, an estimated 40% of those who earn below Rs 20,000 a month invest in mutual funds or stocks. The proportion zooms to 80% for those with a monthly salary exceeding Rs 1 lakh.

Insurance and retirement planning

Advancing age and life-stage goals are the biggest motivators for investing in insurance or starting a retirement plan. An estimated 55% of older millennials and 38% of younger millennials have subscribed to a life insurance plan. While older millennials look at insurance as a financial safety net for their family, younger ones look to benefit from tax deductions available through investment in insurance.

The penetration of health insurance in India is abysmally low. Only 35% and 27% of millennials from either category have a health insurance plan, leaving them financially vulnerable in the event of a contingency.

Related: How money-savvy are the millennials?

How millennials invest: a case study

Mehul Shah is a 30-year-old married professional working for an MNC and draws a monthly salary of Rs 70,000. Rent, utilities, lifestyle expenses and other living costs make up about Rs 30,000 of his monthly fixed outlay. Since he got married recently and is expecting a child shortly, he’s looking for best investment options without taking on too much risk. 

Shah invests Rs 2500 each in two ELSS schemes a month via a SIP, which helps him save tax to the tune of Rs 60,000 p.a. He has made a fresh investment in term insurance for one crore, with an accidental death benefit rider, paid in two half-yearly instalments of Rs 22,000 with payment term of ten years. He has Mediclaim insurance from his employer but has taken an additional family floater policy that covers his wife as well, for Rs 20,000 with a total health coverage of 10 lakh for the family. After a few years, he intends to add his child to the insurance plan as well.

He has an additional Rs 5000 going into a public provident fund (PPF) account every month, which works out to Rs 60,000 p.a. Another five SIPs of Rs 2000 each, in diversified equity large-cap funds for various life goals such as child’s education and retirement planning, totals to Rs 1,20,000 p.a.

Shah makes an average monthly contribution of Rs 3500 for insurance and Rs 20,000 towards investments, which leaves him with about Rs 6500 as idle cash each month. Estimating a 7.9% return on debt investments and 12% on equities, this is what his corpus would look like over time:

Tenure    Investment    Corpus    Gain

3 years    7,20,000       8,79,567    1,59,567

5 years    12,00,000     16,03,046    4,03,046

With age on their side and higher disposable income, the best investment plan for millennials is to follow the ‘100 minus one’s present age’ formula for equity investments and mutual funds. Over the years, the allocation shifts to steadier assets while preserving capital.

Even though equity-based investments tend to offer the best return on investments over the long term, avoid making a significant allocation to these if you do not have the appetite for risk. Ultimately, the best investments are the ones that will allow you to sleep peacefully at night. Take a look at how savvy millennials betting big on mutual funds.