Start young—The smart, boring way to make money
3 min read . Updated: 24 Apr 2023, 11:26 PM IST
PremiumYoung MF investors will benefit a lot if they continue to invest for the long term
The mutual fund (MF) lobby, the Association of Mutual Funds in India (Amfi), shared some interesting data recently. This data provides the age-wise breakup of MF investors. In 2022-23, those in the age bracket of 25 to 35 years formed one fourth of the total number of MF folios. The figure had stood at 16% in 2012-13, suggesting that many more youngsters are now investing in MFs than earlier.
This is true not just in proportion terms, it must be true in absolute terms as well, given that the number of MF investors has gone up. The total number of unique permanent account numbers (PANs)/ Pan Exempted KYC Registration Number (PEKRNs) with MFs has gone up from 1.20 crore as of March 2017 to 3.77 crore as of March 2023. In fact, individuals in the 45+ category continue to rule the roost. Investments made by them formed 35% of the folios in 2022-23. The figure had stood at 35% even in 2012-13. Further, investment made by those in the age group of 36 to 45 years, formed around 24% of the folios in 2022-23, against 19% in 2012-13.
The good news here is that more youngsters are investing in MFs. This might very well be an impact of the fact that it is much easier to invest in a MF through the digital route now than it was a decade back. Indeed, in 2022-23, 60% of MF transactions were digital and they formed around 21% of the total transaction value. In 2012-13, 45% of the transactions had been digital but they formed just 1% of the transaction value.
If the young MF investors continue to stay invested for the long-term and do not indulge in unnecessary churning of their investment portfolio, as is often the case, they will benefit quite a lot. Indeed, the chatter around investing in MFs and stocks and the various strategies that investors can follow, is so loud these days, that the basic principles of investing tend to get lost in the noise.
Starting early is one such basic and very boring principle. Nonetheless, let me show the power of starting early through an example. Let’s consider Sheela, aged 25, who starts investing in a large-cap equity MF by committing to invest ₹10,000 every month through the systematic investment plan (SIP) route. Let’s assume that she does this religiously for 10 years when an emergency strikes and she can’t continue investing. Let’s further assume that the return on investment amounts to an average 10% per year. At the age of 35, when she can no longer continue with the SIPs, the value of her portfolio stands at ₹20.48 lakh. She stays invested and the investment continues to compound at 10% per year. At the age of 60, this investment will be worth ₹2.22 crore.
Now consider Sheela’s friend, Leela, who doesn’t believe in saving money. Money is earned to be spent. Leela finally starts saving at the age of 35 when she sees Sheela get into trouble. Leela SIPs ₹10,000 per month into a large-cap equity MF religiously for the next 25 years.
This investment also earns a return of 10% per year. At the age of 60, the value of this investment stands at around ₹1.33 crore, which is two-fifths lower than that of Sheela, even though Sheela stopped investing after she turned 35.
This is the power of starting young. In Sheela’s case, the total amount of money invested through the SIP was ₹12 lakh ( ₹10,000 per month for 10 years). This amounted to ₹2.22 crore at the age of 60. In Leela’s case, the total amount invested was ₹ 30 lakh ( ₹10,000 per month invested for 25 years). This amounted to ₹1.33 crore at the age of 60. And this is primarily because Sheela started investing 10 years before Leela and gave money an extra decade to compound.
This is a basic and a boring point that gets lost in an era of social media driven investing. But it’s much more powerful than the short-term money making strategies that keep getting offered. The good part is that the Amfi data shows that more young people are investing in MFs. Hopefully, they will stay invested in the years to come.
Vivek Kaul is the author of Bad Money.