Millennials, It’s Time To Be Millionaire
Millennials, Who Are They?
First question which crops up in mind is exactly who are the millennials? According to the Wikipedia, Millennials are also known as Generation Y and are the demographic cohort following Generation X. Demographers and researchers typically use the early 1980s as starting birth years and the mid-1990s to early 2000s as ending birth years. Authors and researchers William Strauss and Neil Howe are credited with naming the Millennials. We can say that millennials are those youth who are born during the year between 1980 and 1995, have new thinking and like to do things according to new and modern ways. But most important thing is that they have grown up in the era of internet and smartphone and have a great understanding of these digital tools.
Why Millennials Matter
According to a recent report of PWC, The millennial generation will shape the world of work for years to come. Their career aspirations and attitudes about work, and knowledge of new technologies will define the culture of the 21st century workplace. Millennials already form 25% of the workforce in the US and account for over half of the population in India. By 2020, millennials will form 50% of the global workforce. In this very PWC report, it is said that millennials’ use of technology clearly sets them apart. One of the major characteristics of the millennial generation is their comfort with the digital world. They have grown up with broadband, smartphones, laptops and social media being the norm and expect instant access to information.
According to Morgan Stanley report millennial generation is also part of a rising middle class in India. Today the per capita income of India is about $1,700, which is expected to rise to $3,650 in year 2025. Morgan Stanley expects that the GDP of India will increase from an estimated $2.2 trillion in 2017 to around $5 trillion in 2025. The expected increase, not only in the number of Indian Millennials and their share of the overall Indian population, but also their growing spending ability will make them a powerful economic force.
Need For A Paradigm Shift In Investing Habits Of Millennials
Even though the new generation has shifted towards latest technology in enhancing their social and behavioural skills, most of them are stuck in a time warp so far their investment habits are concerned. It is a fact that nearly half of the country’s annual household savings (47%) are invested in fixed deposits as per the RBI Annual Report 2015-16. Though the investment in bank FD is going down, but the pace is slow. We must take into account the steep fall in interest rates from 14.5% in 2000 to 6.5% currently. And this is a risky investment strategy, not in true sense of return, but in sense of wealth creation strategy. Millennials must understand that the investment techniques followed by their older generation should be a thing of past for them. Millennials need to adopt a fresh strategy for higher returns on their investment.
Just for an example, PPF currently offers 8%, while the average Consumer Price Index (CPI) inflation for the calendar year 2016 was 5.1%. The net return thus works out to a meager 2.9%. This return will leave you with a very little money in your hands. So millennials should start with an investment strategy for long term wherein they should have a good exposure in equity. And, this should be done Right Now.
Yes, remember that the best day to start investing is TODAY and the best time is NOW. This is because of the magic of Power of Compounding. The world famous scientist Albert Einstein has termed Power of Compounding as the most potent force of universe.
Why ‘TODAY’ And ‘NOW’ Will Work For Millennials
I am going to tell you how power of compounding weaves magic for you millennials. Suppose you start investing today and do this for next 10 years by depositing Rs. 10,000 per month, and you earn annual return of 12%, you will be able to save almost 23 lakh rupees. And, if you continue the similar investment for 20 years, you will have whopping 1 CRORE. Yes, you heard right.
You will not only be a millennial but a millionaire too. Isn’t it attractive? 🙂
But the magic has not ended here. If you continue this only investment for 30 years, guess how much money can you earn in this period? This amount will be about 3.5 crores, yes, three and half crore rupees. (See the following table) This is the magic of power of compounding that only a duration of 10 years can bring a drastic change in creation of wealth. Now, you would have understood why was I stressing of TODAY and NOW for starting investment.
Magical Power of Compounding
(Investment of Rs. 10,000pm)
After 10 years 23 Lakh
After 20 years 99 Lakh
After 30 years 350 Lakh
(annual return 12%)
Where Should Millennials Invest For A Handsome Return
Now, the next question will arise how can you do that, i.e. where to invest the money for 12% annual return? Without any doubt, you have to choose equity wherein you can expect more than 12%. There is more risk in equity investment but in the long run this risk can be brought down. Over the past 10 years, equity has been the top performing asset class with average returns of 13.7%. Compare this with return of 7.66% in short-term debt and 8.03% offered by long-term debt instruments.
Not only that, from 1979 to 2006, Sensex has risen 100 times from 100 to 10,000. Further between 2006 and 2016, Sensex has grown from 10,000 to 28,000 giving an annual return of 17%.
Equity Investment Is Wealth Creator For Millennials
And, all of the financial planners suggest that if you start investing early, equity is best asset class. Equity investment doesn’t mean that you have to fish in troubled water of share market directly, or have to spent a lot of time in buying-selling of individual shares. The best way for a new investor is to start from equity mutual fund where you can choose your plan according to your risk appetite.
There are a variety of mutual fund schemes available in the market and you can select any one or two of them as per the quantum of your investment amount. To name a few, pure equity fund, index fund, balanced fund, hybrid fund, small cap fund are the categories. And, one more thing, if you are starting investment with a small amount there is no need to worry. Just start through Systematic Investment Plan i.e. SIP and you can easily achieve your investment goal.
Diversification Is A Keyword For Millennials
However, as the proverb says, you should not put all your eggs in one basket, so you need to diversify your investment as well. Millennials can consider age-appropriate diversified asset spread. It should include equity for long-term goals and debt for emergency funds and liquidity.
An ideal proportion for those in 20s would be an aggressive 85-100% in equities and up to 15% in debt.
As millennials age, they can bring down the proportion of equity over the years to reach 65-85% equity and 35-15% debt between 45 and 60 years. In the final stage, they can go for 0-35 % equity against 65-100% debt during the retirement period.
Apart from investment millennials need to understand the importance of tax planning as well as insurance. I will guide you about both these things later on. So watch this space. Right now, just remember that it is time to move out of the safe zone investing and usher in the world of smart investing. And, if you have any question, concern or feedback, just write to me.