Beyond Fixed Deposits Why Young Indians Need to Diversify Their Investments in 2025

February 28, 2025

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Ankit and Sneha, both pharmacy firm owners, have always relied on fixed deposits as their primary investment avenue. However, a recent news headline— “Why Must Indians Diversify Their Income?”—caught their attention. While they have heard about higher returns from diversified investments, they have never taken the plunge. With February 2025 already here, they wonder if they are doing enough to secure their financial future.

This guide explores why young Indians should diversify their investments and how it can enhance their wealth in 2025.

Why Investment Diversification is Essential

1. Risk-Based Investing: Matching Investments to Risk Appetite

Investors should evaluate their risk tolerance before choosing assets. Volatility accompanies equity investments, but various strategies suit various levels of risk:

High-risk investors: Growth stocks, mid-cap & small-cap schemes

Moderate-risk investors: Blue-chip stocks, index schemes, hybrid schemes

Low-risk investors: Large-cap schemes, dividend-yielding stocks

An investor who is young and has a long horizon can take calculated risks in equities, riding market cycles for big growth. To assess your risk tolerance, use this link: https://docs.google.com/forms/d/e/1FAIpQLSd261_aqybIekp7VlUOykM2o3C8r6DM8PUkt65mWrOZdV5JRg/viewform

2. Goal-Based Investing: Reaching Financial Milestones

Investing without a goal can result in inefficient capital allocation. Rather, goal-based investment ensures financial discipline. Some of them are:

Short-term goals (3-5 years): Invest in hybrid funds, debt funds

Mid-term goals (5-10 years): Large-cap and index funds

Long-term goals (10+ years): Equity mutual funds, direct stock investments, sectoral funds

For example, if Sneha and Ankit wish to retire in 20 years, an aggressive equity-based portfolio can compound their corpus, while balancing risk with gold and bonds.

3. Defeating Inflation through Equity Investments

Fixed deposits usually yield between 6-7%, hardly keeping up with India's average inflation rate of 6%. The money in FDs, therefore, erodes value over time. Equity investments, on the other hand, return inflation-beating consistently. For instance, if 6% is the erosion in purchasing power per annum due to inflation and an FD provides a return of 7%, then the real return is only 1%. Equities providing a return of 12% result in a real return of 6%, promoting wealth creation.

4. Diversification of Portfolio for Managing Concentration Risk

Although equity must remain a core concern, diversifying across asset classes minimises the exposure to risk. A best-fit asset composition for various investor types can resemble:

Aggressive Investors: 70% stocks, 20% fixed income, 10% gold

Moderate Investors: 60% stocks, 30% fixed income, 10% gold

Conservative Investors: 40% stocks, 40% fixed income, 20% gold

5. Global Market Participation

Domestic investments are prone to local economic fluctuations. Investing in global markets through international funds reduces exposure to local risks and opens doors to global growth opportunities. Investing in international funds, for example, gives exposure to different economies and currencies.

GIFT City in Gujarat is India's International Financial Services Centre (IFSC), providing a platform for access to global markets for investors. In her Budget speech on 1 Feb, Sitharaman extended some GIFT City tax benefits that were going to expire between 2024 and 2026 until March 2030 and allow mutual funds and ETFs to relocate to GIFT City without paying any capital gains tax, effective April 2026 onwards.

6. Building an Emergency Fund

Prior to diversification, one should possess an emergency fund of 3-6 months' worth of expenses. This provides financial safety in case of unexpected events such as loss of employment or illness, avoiding the necessity of selling investments at low points. For instance, if a person had monthly expenditures of ₹25,000, he would be looking at an emergency fund of at least ₹75,000 and not more than one and a half lakh rupees.

5 Ways Young Indians Can Diversify Their Investments

1. Invest in Mutual Funds and SIPs

Mutual funds pool investments and offer diversification across stocks and bonds. Systematic Investment Plans (SIPs) ensure disciplined investing, mitigating market volatility through rupee cost averaging.

• Example: Investing ₹10,000 every month in an equity mutual fund over a period of 20 years may accumulate nearly ₹1 crore at a return rate of 12%.

• Example: Investing ₹5,000 per month in a hybrid fund can provide both equity and debt exposure.

2. Direct Stock Investments: For those willing to invest in research and trends in the market, direct equity investments in sound companies at their fundamentals hold the promise of high growth. Prioritizing areas such as technology, healthcare, and green energy can deliver long-term rewards.

3. Hybrid and Index Funds for Balanced Growth: For the risk-averse, hybrid funds (a combination of equity and debt) and index funds (passively managed funds) offer relatively stable returns with less risk.

4. Educate Yourself on Finance

Young Indians rely on digital platforms for financial knowledge. Studies show:

• 62% learn about financial planning via YouTube.

• 52% seek advice from family and friends.

Continuous learning ensures smarter investment decisions. Begin by reading an educational book or taking an online course that offers basic investing lessons. “SEBI investor awareness program” is a free program launched by SEBI on awareness about the stock market. For example, understanding how mutual funds work will surely enhance your confidence in making investment decisions.

5. Rebalance Your Portfolio Regularly

Periodic rebalancing helps maintain the desired asset mix. For example:

• If Ankit’s equity allocation rises to 65% due to market gains, he should sell some stocks and reinvest in bonds or liquid funds to bring rebalancing to help monetise profits from different asset classes.

• Adjusting based on emerging trends ensures long-term financial stability.

• To make informed decisions and active monitoring of the portfolio, Ankit should consult a financial advisor. Consulting a financial advisor can give a sense of clearness and assurance in the choices you make concerning investments.

Final Thoughts

Without diversification, investing can be risky and ineffective. Young investors who start diversifying now will likely achieve superior long-term returns. Remember: A well-diversified portfolio lowers risk and accelerates wealth-building.

At Dayco, our professionals are here to guide you on your investment journey. Start diversifying today and secure your financial future!

-Sukalyan Halder & Marifur Rahaman

-Dayco India

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Beyond Fixed Deposits Why Young Indians Need to Diversify Their Investments in 2025

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