5 Reasons you should start young with mutual funds

A lot of young earners these days are trying to figure out ways to save and invest. Such people should start early with financial planning to get a clear understanding of their goals. Once they have established realistic financial goals, investing may become simpler. The new generation is willing to invest in market-linked schemes like mutual funds. However, such people should first understand their risk appetite and invest accordingly. Mutual funds may hold the potential to offer investors with long term capital appreciation, but they are prone to market volatility. New investors should always seek professional consultation and take an informed investment decision.

Today, we are going to discuss 5 points why one should start investing in mutual funds at a young age. But before that, let us understand what mutual funds are.

What is a mutual fund?

Mutual Funds are a pool of professionally managed funds that invest in a diversified portfolio of securities to generate capital appreciation over the long term.

SEBI, the regulator of securities and commodities here in India, defines mutual funds as –

“A mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time.”

Mutual fund houses collect money from investors sharing a common investment objective and invest the capital raised, across asset classes, commodities, and money market instruments to generate income. Mutual funds may be a smart investment option for millennials to save and invest and earn some decent capital appreciation.

Here are 5 reasons why you should start young with mutual funds –

Inculcate the discipline of investing

It is important to understand the importance of investing. Young age is an apt time to inculcate the discipline of regular investing. People who realize the importance of investing at a young age are more likely to achieve their long term goals. Starting young may not only inculcate financial discipline but may also help investors realize the importance of saving.

Investors may be able to take more risk

Young individuals who have just kicked off their professional journey may be able to take more risks. Investors who have more time in hand may be able to build an aggressive mutual fund portfolio. Those who start investing in their mid-20s may have a high risk appetite than those who start investing when in their mid-40s or early 50s. The younger you are, the more risk you might be able to take and invest accordingly. Young investors may be able to have a more equity oriented portfolio and may also get a chance to recover from investment errors, if any.

Generate long term wealth

To create wealth with mutual funds, investors may have to remain patient. Investors who continue investing systematically and remain patient with their investments are often able to get closer to their financial goals. Those who start investing at an early age have an upper hand over those who start late. Imagine the wealth one can create when they have 25 to 30 years to invest than those who have just 10-15 years in hand. Equity mutual funds may be volatile over the short term, but investments made with a long term investment horizon may help investors build a commendable corpus.

Power of compounding

As stated earlier, mutual fund investors’ money may only be able to grow if they decide to remain patient and continue investing till their investment objective is accomplished. Thanks to the power of compounding, an investor’s invested sum can grow over the long term. In mutual fund terms, the power of compounding refers to the interest earned on the returns earned from the initial investments made in the mutual fund scheme. Compounding may come into effect only over the long term and young investors may be able to benefit if they start their mutual fund journey early.

Investors can start small

Investors who have more years in hand to invest can start their mutual fund journey with small SIP sums. A Systematic Investment Plan (SIP) is an investment method that allows retail investors to invest small fixed sums at regular intervals. This will give investors an opportunity to create long term wealth even by investing small sums and gradually increasing them from time to time.

Young investors should not miss the opportunity of starting their investment journey early. The earlier they invest, the more corpus they might be able to accumulate over the long term.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.