Starting your investment journey early on brings many perks: Here’s Pratik Oswal’s advice to millennials
While mutual funds may be subject to market risks, there’s no doubt that they are a sound medium for investors to park their money in over the past couple of decades. Early investors would vouch for this, with their returns more than doubling in a few years, simply because they remained invested through the good and bad times.
And, it’s time that millennials in India who are new to investing also understand the importance of mutual fund investments. To shed some more light on such assets and the benefits of starting the investment journey early on in life, YourStory turned to Motilal Oswal Asset Management Company, the pioneer in providing financial services in the country for several decades.
In a freewheeling chat with Shradha Sharma, Pratik Oswal, Head of Passive Funds at Motilal Oswal AMC gave viewers key insights on the right ways to invest in mutual funds, the benefits of opting for simpler products such as passive funds, and debunked several myths about the world of finance.
Here’s a look at five key takeaways from the chat.
Save first and spend later
While experts have always stressed the need to save, the present COVID-19 situation, Pratik said, has brought to the fore the importance of saving.
He suggested taking a simple approach by keeping some money aside from your income for saving instruments. From an income of Rs 100, you can easily save Rs 20-25 and more in mutual funds, Pratik said, adding that one can also look at other assets such as gold, debt funds, international equities etc, but the key is to remain invested through all times. “One must not invest because the performance of a fund is good, but invest because you believe in diversification.”
Keep it simple with passive funds
Investing can either be active or passive. Passive investing looks to maximise returns for an investor by keeping the buying and selling of assets at a bare minimum level. Here, the rationale is that the longer you hold an asset, the better the returns it will generate for you.
A passive fund helps you invest in an index which replicates the returns from that index. For instance, if you invest in a Nifty fund, and if the Nifty rises by 10 percent in six months, your portfolio value would have also increased by 10 percent.
“These are simpler products to invest in. The complexity in the Indian mutual funds landscape is very high, and there are thousands of options for investors. With passive funds, you are just limiting the options to just about five or ten and increasing the scope of returns,” Pratik said, adding that they are also low-cost and effective products.
A corpus to stay above inflation
Investors must understand the need to invest their money in mutual funds. “Most people should be investing because of inflation, which has destroyed the value of the money that you have parked in your banks etc. It is prudent for investors to conclude that I must invest so that my purchasing power capacity is maintained over the lifetime,” Pratik said.
Pratik also explained how interest rates offered on assets such as bank deposits have been deteriorating. If you compared that with a steady investment in mutual funds, your wealth would not only have the potential to double or even quadruple, but it could also be in line with the level of inflation around the time of redemption.
Harnessing the magic of compounding with an early start
It is a must for millennials to begin investing early on in their working career. Pratik offered an example of one of the richest people in the world, Warren Buffett. “He started investing at the age of 11 and his only regret is that he didn’t start earlier.” He further went on to cite an example of a millennial investor with an investment of Rs 1 lakh in a mutual fund at the age of 18. This would grow to a little over Rs 2 crore, at the rate of 15 percent, by the time the investor turns 55, thus showing the importance of an exponential growth in the wealth invested.
This is possible because of the concept of compounding, which is a process where an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from the preceding period.
In it for the long haul
Once you invest in mutual funds, or even in passive funds, it is very important to remain committed to this asset. Pratik added that investors must have the belief that that the returns from this will be phenomenal over the course of many years, and they must remember this particularly when the equity markets are volatile or in a phase of weakness.
“Investing consists of about 10 percent of the process and 90 percent of psychology. One must invest and wait and remain invested even during bad times. A regular investment mentality is essential,” Pratik said, adding that a disciplined approach based on your long-term goals will help you with this behaviour.
For instance, you can have the goal of buying a car, a home, or even for your retirement and that will help you remain invested and focused in this journey. He also recommended that investors must not look to make quick returns through assets such as stocks/equities as they have the scope for high returns in a short span but can also wipe out all your money in much lesser time.
Thus, millennials must focus on index funds or passive funds to maintain a simpler approach. Even if they seek to venture into equities, one must experiment with a small amount and then gradually increase that based on the learnings from this investment, Pratik said.