September 30, 2020

Why should millennials start a SIP in a hybrid fund?

Millennials are one of the luckiest races. The salary that is on offer for youngsters today is quite acceptable. Back in the day, people had to wait for several appraisals to get to a figure which today’s millennials are getting offered on their first job. However, instead of saving the money that they are earning, today’s young generation is more oriented towards spending it. The problem with millennials is that they are lured by luxuries like eating at fancy restaurants, hiring private cabs for travel and spending almost every week on new apparels. This leaves most of them bankrupt at the end of the month.

The young generation must understand that only if they start saving and investing at a young stage, they will be able to become financially stable in future. So it’s time to ignore the short lived luxuries and focus on accumulating wealth in the long run. Today, we have a choice for almost everything. Be it investing in a property, buying a luxury car or getting a new smartphone, there’s something for almost everyone out there. So is the case with financial products. Today, in India we have ample number of investment schemes to choose from. However, investors are expected to determine their risk immune before investing in any scheme.

Mutual funds as investment option

In the recent past, mutual funds have gained traction among a large audience here in India. They offer active risk management, carry a diversified portfolio and have offered far better returns than traditional schemes in the past.

SEBI, the regulator of mutual funds in India describes them 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 the offer document.”

What AMCs do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is spread across multiple asset classes like equity, debt, treasury bills, debentures, certificate of deposits, etc. The performance of a mutual fund depends on the performance of its underlying assets.

What are hybrid funds?

Some mutual funds like equity funds heavily invest in stock and other equity instruments. Other funds like debt funds invest in fixed income securities that pay regular interest. A hybrid fund or balanced fund on the contrary, invests in both equity and debt related instruments. In which asset class a hybrid fund may invest predominantly will solely depend on the nature of the fund and the risk profile that it carries.

 

For example, a conservative hybrid fund is supposed to invest around 25 percent in equity while the rest is invested in equities. On the other hand, an aggressive hybrid fund is supposed to invest around 65 to 80 percent of its total assets to equity, and the rest in debt securities.

Why is starting a SIP in hybrid funds a good option for millennials?

A Systematic Investment Plan (SIP), is an easy and hassle free way to invest in mutual funds from the comfort of your home or office. You can invest in mutual funds using your laptop or even your smartphone and a decent internet connection. Millennials can start a SIP in hybrid funds by informing their bank, following which every month on a fixed date, a predetermined amount will be debited from their savings account and electronically transferred to the mutual fund. This way, they will not only start saving automatically, but also inculcate the discipline or investing regularly. Since hybrid funds invest in equity, they give investors an opportunity to seek capital gains, while the debt aspect of it tries to balance investment risk. Also if one remains invested in a hybrid fund through SIP for a long time, they can benefit from compounding and might even be able to achieve their ultimate financial goal.

Mutual fund investments are subject to market risks, read all scheme related information carefully.