Youngsters prefer mutual funds over insurance and fixed deposits for retirement planning

Financial preferences of youngsters in India are undergoing a significant transformation. Mutual funds have emerged as the most favored financial instrument for retirement planning, with a substantial 75% of respondents choosing them as their go-to option, according to a recent Bajaj Capital's survey.

This shift marks a considerable change in the landscape of financial planning.

Traditionally, fixed deposits and various insurance products have held a dominant position in retirement planning strategies. It's crucial to note that insurance products, including term and health insurance, remain a vital component of financial planning for many youngsters. 44% of the respondents still consider these insurance options as essential for safeguarding their financial future, emphasising the importance of risk coverage.

Fixed deposits, which have long been seen as a safe haven for savings, are preferred by 43% of the respondents. The reliability and predictability of fixed returns continue to attract a substantial portion of the younger generation.

However, Bajaj Capital's survey results indicate that the new generation is increasingly diversifying their investment portfolio by opting for mutual funds. This preference can be attributed to several factors:

Mutual funds provide the opportunity for higher returns on investment compared to traditional fixed deposits, which offer fixed and often lower interest rates.

Mutual funds enable investors to diversify their portfolio, mitigating risk and potentially increasing returns over time.

Young investors appreciate the liquidity offered by mutual funds, as they can easily buy or sell units at any time, in contrast to the lock-in periods associated with fixed deposits and certain insurance policies.

The preference for mutual funds, particularly among the younger generation, reflects an evolving mindset when it comes to financial planning. This shift is reinforced by data from the Association of Mutual Funds in India (AMFI), which shows that the Assets Under Management (AUM) of the Indian Mutual Fund Industry has reached new heights. As of September 30, 2023, the AUM stood at an impressive ₹46,57,755 crore.

What's even more striking is the growth trajectory of the mutual fund industry. A decade ago, in 2013, the AUM was a modest ₹7.46 lakh crore, but it has since surged to ₹46.58 lakh crore in 2023, signifying a more than six-fold increase in just ten years. In the five-year span from 2018 to 2023, the AUM nearly doubled, growing from ₹22.04 lakh crore to ₹46.58 lakh crore.

This significant expansion showcases the growing popularity of mutual funds among investors. The industry hit the milestone of ₹10 lakh crore in May 2014, and within just three years, it doubled, crossing ₹20 lakh crore in August 2017. By November 2020, the AUM had surpassed ₹30 lakh crore. As of September 30, 2023, it stood at ₹46.58 lakh crore.

Another noteworthy achievement is the number of folios, or accounts, in the mutual fund industry. In May 2021, the industry surpassed 10 crore folios, and as of September 30, 2023, it stands at 15.71 crore (157.1 million). Among these, approximately 12.55 crore (125.5 million) belong to Equity, Hybrid, and Solution Oriented Schemes, with the majority of investments coming from the retail segment.

A driving force behind this growth is the Systematic Investment Plan (SIP). In September 2023, SIP inflows reached an all-time high of ₹16,042 crore, marking a substantial increase from the previous month's ₹15,814 crore. This growth can be attributed to several factors, including a record 7.12 crore SIP accounts in September, compared to 6.9 crore in August 2023.

Financial experts advise a balanced approach, recommending that individuals diversify their investment portfolios to minimise risks and enhance their financial stability in the long run. While mutual funds have gained prominence, a mix of various financial instruments can provide a comprehensive strategy for securing one's retirement.