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Low-cost investment diversification tools for millennials


The time-tested primary investment style for everyone, including millennials, remains the same, which is based on one’s risk tolerance. However, compared to the earlier generations, millennials are much more tech-savvy in nature and are open to experimentation, especially when it comes to investment avenues.

With developing markets, growing inflation, and expanding economies, it is essential for not just millennials but all generations to upgrade their portfolios to beat inflation and fetch competitive returns.

“A major part of the earlier generations believed in investing in traditional instruments to have a sense of security against their capital. The returns earlier on these investments were also comparatively high, and hence, they never worried about not beating the inflation. Since India is a developing country, people also had their doubts about investing in the equity sector,” said Priti Rathi Gupta, founder, LXME, a financial platform for women.

Now, millennials need to learn that their investment must not only fetch them returns to fulfill their financial goals but also supports their standard of living. Within the different primary risk profiles, there can be secondary investment styles, depending on the products available and that evolve over the time. These secondary styles can be different for millennials in comparison to the earlier generations.

“Markets are getting efficient over time and now active funds are finding it hard to beat the benchmark indices. Passive funds, which mimic returns of indices with lower cost than active funds, make more sense. When earlier generations started investing, active funds were the go-to products due to non-availability of passive funds. This is now changing with more passive funds coming in the market. So, millennials can look at starting with passive funds as a secondary investment style,” said Swapnil Bhaskar, business head, Niyo Money, a fintech startup.

To achieve diversification with minimal efforts in implementation and low-cost for millennials, there are passive funds available for fixed income, equity, gold or investing in US, Japan etc. “To further reduce the cost, one can opt for commission-free direct plans of these funds, wherever available,” said Bhaskar.

A key difference in the investing style of millennials is that they prefer online modes of investing over offline, unlike the earlier generations, which prefer the other way around.

“Owing to increased levels of awareness, digital adoption and product innovation over the years, investors, including millennials have begun appreciating the potential of exchange-traded funds or ETFs. They combine the trading flexibility of a stock, coupled with diversification and low costs of a mutual fund. The fact that ETFs offer exposure to a basket of stocks at a fraction of the amount and have several advantages compared to direct investing, are factors which have helped elicit a favourable response from millennials,” said Chintan Haria, head-product development and strategy, ICICI Prudential AMC.

Today, ETFs are available across asset classes – equity, debt and gold. Within equity, an investor has the option to choose from market capitalization-based ETFs, sector-based ETFs or smart beta ETFs. Even though debt ETF is at a very nascent stage in India, investors have the option of liquid, gilt and PSU debt ETFs.

“In today’s time, a majority of financial instruments available for retail investors, come with negligible cost. One must be aware of their investor profile that includes their financial goals, risk appetite, a time horizon of investment, to make a sound decision,” said Gupta.

For emergency fund, Gupta suggests debt mutual funds such as overnight, liquid and ultra-short duration funds and short-term fixed deposits or recurring deposits. For retirement, she suggests a combination of equity and debt mutual funds, public provident fund (PPF) and National Pension Scheme (NPS). Lastly, millennials can go for equity mutual funds, fixed income instruments and digital gold (10-15% of one’s portfolio) for wealth creation.

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