Today’s job market for the millennials is widely different as compared to that of the baby boomers. In the US, stagnant wages, lack of suitable employment opportunities, a wide income gap between the rich and the middle class, decreasing labor market mobility for the past two decades, lesser savings – the problems go on. India’s 440 million millennials, a significantly greater population than that of the US, faces the dilemma of saving less than 10% of their income, even lesser than their lifestyle expenditures. That’s where this article comes in – to look at how it’s going and the recent changes.
Did you know that the healthy proportion of income to be invested for the future is around 10-40%? If you don’t know and don’t do so, no worries. A simple glance around and you’d know that this is the reality everywhere. As promising as recent trends are, with the opening of a huge number of demat accounts and the stock market news becoming part of daily discussions, it’s vital to check the long-term potential of such behavior.
The Indian stock market has been feeling quite optimistic despite the effects of the pandemic rippling through various sectors of the economy. This translates into the opening up of more than 10 million new investment accounts in 2020. Companies listed on the National Stock Exchange (NSE) saw a boost of 9% in retail ownership by Q3 of 2020, the highest since March 2018. Therefore, as devastating as the pandemic was, it also led to some of us thinking about the importance of investments in securing our future.
Compared to the fact that the typical division of household assets comprises only 4% of equities, 55% of the population in the US and 12.7% in China have individual stock holdings or use the services of mutual funds. We’ll look into the negativity surrounding our current investing behavior later, but these numbers will help you understand why exactly the stock market optimism and your friend explaining to you about the growth potential of the Indian IT sector are equally important.
What are the current patterns in millennial investing?
As millennials form 47% of the total workforce, a wide array of investment opportunities and service providers are popping up to help them meet their demands for a secure financial future. Individuals, as early as 26 years, believe in the two-pronged approach of starting early and starting wisely. That’s implied in the 60% of investors engaging in the market for the first time with a 64% preference for mutual funds, 28% for equity, and 8% for gold.
Be it man or woman, there are no significant gaps in investment and both sections are open to different kinds of investment avenues. Gold is traditionally used as a hedge against market volatility which explains the annual increase of 59% in its holdings. This must be easily understood given the number of times you might have heard about the amount of gold given for your cousin’s wedding by your relatives. It would definitely be an interesting social experiment to ask about the interest of these relatives in investing in stocks or equities – make sure to mention risk diversification and SIPs.
There’s also an equally significant preference for central retirement schemes such as the National Pension Scheme (NPS) and Equity-Linked Savings Schemes (ELSS). The latter option has turned out to be an attractive option for saving taxes under Section 80C of the Income Tax Act.
76% of millennials prefer systematic investment plans (SIP) over lumpsum payments, indicating a financial discipline. For further clarity, SIPs are regular investments of small amounts into your preferred schemes. Since they’re based on monthly payments, they’re suited for risk-neutral investors who’d prefer to evaluate the market’s fundamentals before investing. A healthy risk appetite indicates a leaning towards equity, exchange-traded funds (index funds where securities in ETFs are held in the same proportion as the index), and asset classes such as real estate with more growth opportunities.
Geographically, investment preferences are not just from the metropolitan cities in the top five states of Maharashtra, Uttar Pradesh, Delhi, Gujarat, and Karnataka. Sub-urban areas in Tier-2 and 3 cities have also registered a spike in investing preferences and risk diversification through an array of financial products.
Over 2 lakh trading accounts were opened in 2020 that involved a minimum of 15 stocks and averaged an amount of Rs. 46,000. 41% of these individuals also took up intraday trading that indicates a higher risk tolerance and the willingness to utilize the daily movements of stocks.
What does the Indian millennial investing scene look like?
The gross savings ratio of Indians has come down from 37% to 30.2% (2007-20) according to World Bank data. Since all of our important indicators have increased in value, be it GDP or exports, what’s kept us from involving in the financial markets? Well, one of the reasons is your parents. Not exactly your parents, but the financial advice, risk averseness, and traditional savings deposits in banks and post office savings that they’ve passed down to you. It’s also the reason why you flinch back when your friend barely mentions their stock market investments and revel in quiet satisfaction if it tanks – your confirmation bias enjoys the latter a lot. Thank God you didn’t go and invest in stocks.
All of the Demat account opening activities are also a part of the regret aversion bias, but we digress. The potential of the recent interest in stock markets, if extended over a longer term, has implications for the attractiveness of the Indian market to global companies as well. Let’s put this into perspective – the New York Stock Exchange currently commands a market capitalization of US$26.6 trillion and the Bombay Stock Exchange has a market capitalization of US$3.6 trillion.
Millennial investing behavior is an interesting phenomenon to watch out for in the future, provided the negativity surrounding the stock market volatility, personal finance preferences, and the high degree of risk aversion undergo a systematic change as well.