Q. There has been a spurt in investing activity among the Gen Z and millennials. What explains this?
Nifty 50 has been rangebound over the last year but from the bottom formed in April 2020, it has delivered returns, which has spurred the younger generations like millennials and Gen Z to enter the stock markets. This was also explained by the spurt in the number of retail trading accounts opened over the last two years.
Q. What should the Gen Z keep in mind before investing?
Investing is a wealth building process and requires time, patience and constant monitoring of holdings in order to compound your money over longer time frames. Returns generated over short time frames as seen in the post Covid era has given a deceptive signal to the Gen Z that the stock market is a mechanism to make quick money with less efforts, which is not always the case. Stock markets move in cycles and also experience periods of nil or negative returns. An investor needs to be patient and stay the course by investing in weak cycles also. The Gen Z should understand that equity may offer high returns but requires a lot of patience and understanding. Longer time horizons are very crucial for wealth generation in order to ensure time diversification over bull and bear cycles. The Gen Z should also recognise that investing and trading are separate activities, which require separate skill sets, and should not confuse both, but rather focus on learning the nuances of investing first.
Q. Which instruments are suitable for the Gen Z to invest?
As Gen Z can afford long-term investments, equities may be the best asset class for them. Equities require long time horizons for investing in order to ensure time diversification over bull and bear cycles and as evident, the Gen Z and millennials are the generations which have the highest time horizon available for investments. If the individual has time to allocate on research, they may consider direct investing, but if not, it’s better to allocate most of their equity investments to mutual funds through the SIP (systematic investment plan) route where professional investors are dedicating their full time to focus on generating risk-adjusted returns. Investing in MFs through SIPs will also inculcate the habit of investing among them which is imperative for wealth generation.
Q. Is over-exposure to equities advisable just because they are young and in which circumstances?
It all depends on the individual’s financial position, liabilities and risk-taking ability. High allocation to equity investments is definitely advisable to young individuals as they have a very long-term horizon to the tune of 20-30 years for letting their investments compound. Compounding is considered as the 8th wonder of the world because it creates non-linear sharp J curve impact on your wealth, and higher time frame is one of the biggest contributors to enable compounding. If we consider other situations, individuals with high salaries, low living expenses, low fixed costs, no family dependency and high family wealth may also keep high allocation to equity investments.
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