Mutual fund (MF) lobby, Association of Mutual Funds in India (Amfi) recently shared some interesting statistics. This data provides age-wise breakup of mutual fund investors. In 2022-23, people in the age group of 25 to 35 years would make up a quarter of the total number of MF folios. The figure was 16% in 2012-13, which indicates that many more youth are now investing in MFs than before.
This is not only true in terms of proportion, it should also be true in absolute terms, given that the number of MF investors has increased. The total number of Unique Permanent Account Number (PAN)/PAN Exempted KYC Registration Number (PEKRN) with mutual funds has increased from 1.20 crore in March 2017 to 3.77 crore by March 2023. In fact, individuals in the 45+ category continue to rule the roost. The investments made by them make up 35% of the folio in 2022-23. In 2012-13 also this figure was 35%. Further, investments made by people in the age group of 36 to 45 years accounted for about 24% of the folios in 2022-23, as against 19% in 2012-13.
The good news here is that more youngsters are investing in MFs. This could be an effect of the fact that it is now much easier to invest in MFs through the digital route as compared to a decade ago. In fact, in 2022-23, 60% of MF transactions were digital and accounted for about 21% of the total transaction value. In 2012-13, 45% of transactions were digital but they accounted for just 1% of transaction value.
If young MF investors continue to stay invested for the long term and do not indulge in unnecessary churning of their investment portfolios, as is often the case, they will stand to gain immensely. In fact, the discussion about investing in MFs and shares and the various strategies that can be adopted by investors is so loud these days that the basic principles of investing get lost in the noise.
Starting early is such a basic and very boring principle. Nevertheless, let me show you the power of starting early through an example. Let us consider Sheela, 25, who commits to investing and starts investing in large-cap equity MFs 10,000 every month through the Systematic Investment Plan (SIP) route. Let’s assume 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 averages 10% per year. At the age of 35, when she cannot continue SIP, the value of her portfolio is 20.48 lakhs. She stays invested and the investment keeps growing at 10% per annum. This investment will be worthwhile at the age of 60 2.22 crores.
Now consider Sheela’s friend Leela, who does not believe in saving money. Money is earned to be spent. Leela finally starts saving at the age of 35 when she sees that Sheela is in trouble. Leela SIP 10,000 per month in large-cap equity MFs religiously for the next 25 years.
This investment also earns a return of 10% per annum. At the age of 60, the value of this investment becomes close to 1.33 crores, which is two-fifth less than that of Sheela, even though Sheela stopped investing after she turned 35.
Such is the power of starting young. In case of Sheela, the total amount invested through SIP was 1.2 million ( 10,000 per month for 10 years). this amount is 2.22 crore at the age of 60. In case of Leela, the total amount invested was 30 million ( 10,000 per month invested for 25 years). this amount is 1.33 crore at the age of 60. And this is mainly because Sheela started investing 10 years before Leela and gave the money an extra decade to compound.
This is a basic and boring point that gets lost in the age of social media driven investing. But it is much more powerful than the short term money making strategies that keep being offered. The good news is that AMFI data shows that more and more young people are investing in mutual funds. Hopefully, they’ll stay invested for years to come.
Bad Money is written by Vivek Kaul.
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