Invest Guide March 2025

Financial Habits and Money Mindsets -

Understanding Generation Z: Digital Natives and Their Growing Financial Influence

Generation Z or Gen Z refers to people born between 1996 and 2010. They are typically characterized by being digital natives, the first generation to grow up with the internet, climate change concerns, and the financial shifts of recent years, including the impact of COVID-19. As the second-youngest generation, they are positioned between millennials and Generation Alpha. Their financial influence is growing, with their consumption power expected to surge in the coming years, especially as they enter the workforce. Known for their research-driven purchasing habit, Gen Z are likely to apply the same diligence to investing.

According to a recent report, India is a young nation with 377 million Gen Z population and they will be the biggest contributor to the country's consumption growth, driving $1.8 trillion worth of direct spend by 2035.

By 2025, the Gen Z direct spend will total $250 billion, with half of them earning. The report by Snap Inc (NYSE:SNAP), partnered with Boston Consulting Group (BCG) states that Gen Z's collective spending power will surge from $860 billion to $2 trillion by 2035, and they are 1.5 times more likely to research their purchases compared to millennials. This generation is key to India's future consumption trends.

A particularly notable aspect is Gen Z's purchasing behaviour, with this generation being 1.5 times more likely to research products before making a purchase compared to millennials. This trend suggests that Gen Z places a higher value on informed decision-making, likely influenced by digital tools, social media, and online reviews that facilitate easy access to product information. The financial and investment habits of Gen Z are heavily influenced by their tech-savviness, preference for self-management, values-driven decision-making, and growing interest in digital assets, particularly cryptocurrencies. These factors contribute to a unique approach to managing money and investing, one that differs significantly from previous generations.

Let's break down how each of these elements is shaping Gen Z's financial behaviours:

Tech-Savviness and Digital Finance - From managing day-to-day finances to investing, Gen Z favoursmobile apps and online platforms. They rely on fintech apps for easy money transfers, investments, and budgeting. They expect immediate, on-the-go access to financial tools and information. This reliance on digital finance leads to an increased use of robo-advisors for investment management and tools that automate savings.

Savings and Financial Security - While Gen Z is known for embracing digital investments, they are also conscious of long-term financial security like building an emergency fund. By using digital tools and platforms to automate savings and invest strategically, they are well-positioned to achieve long-term financial stability. This focus on both immediate opportunities and long-term security (such as retirement planning and diversified investments) reflects a comprehensive approach to wealth-building that will shape their financial futures.

Preference for Self-Management - Gen Z is highly self-reliant when it comes to learning about personal finance. They use blogs, social media influencers (finfluencers), podcasts, and YouTube channels to educate themselves on everything from budgeting to investing in stocks and crypto. Many Gen Z investors prefer to use online platforms where they can directly manage their portfolios, rather than relying on a traditional financial advisor. This includes DIY investing in stocks, bonds, and real estate via apps.

Values-driven financial and investment choices - Many Gen Z investors are drawn to sustainable investments like ESG (Environmental, Social and Governance). They prefer to put their money into companies that align with their social, environmental, and ethical values, supporting businesses that advocate for climate action, diversity, and corporate responsibility. Beyond just seeking profits, Gen Z is interested in investments that provide measurable positive social outcomes, such as supporting gender equality or funding green energy start-ups. They see financial success as a way to create meaningful change.

Focus on Digital Assets - A defining trait of Gen Z's financial and investment behaviours is their interest in digital assets. Growing up with internet and digital technologies makes them more likely to embrace digital currencies like Bitcoins and Cryptocurrencies. They are more inclined to explore decentralized finance platforms (DeFi) that offer alternative ways to earn, lend, and borrow money. Gen Z is also seen engaging with the world of non-fungible tokens (NFTs), a form of digital ownership often associated with art, collectibles, and even virtual real estate. This generation sees NFTs as a blend of investment and culture.

Types of investments and products owned by generation -

Social Media Influence - Many Gen Zers follow "finfluencers" (financial influencers) on social media for investment tips, financial advice, and the latest trends in personal finance. This has democratized financial education but also led to the spread of both good and bad advice. Peer pressure and trends on social media also influence Gen Z to participate in certain investment trends or to buy into "hot" stocks and digital assets, sometimes without fully understanding the risks involved.

Investment trends - How Gen Z is shaping their financial future through stocks, mutual funds, and gold.

The investment landscape in India is undergoing a significant transformation, driven largely by the financial behaviours of Gen Z (ages 12-28) and Millennials.

Recent surveys, including The Fin One - Young Indians' Saving Habits Outlook 2024, conducted in collaboration with Nielsen, have shed light on the evolving approach these young adults are taking toward saving and investing. The survey reveals that 93% of young adults in India are consistently saving money, with many setting aside 20-30% of their monthly income for future financial goals. Interestingly, 45% of respondents expressed a preference for investing in stocks over more traditional options like gold and fixed deposits. This shift highlights the changing investment mindset among India's younger generation, who are increasingly seeking higher returns through the stock market rather than relying on conventional, low-risk investments.

"The Fin One study shows that 68% of respondents use automated savings tools and Mobile apps to manage their finances, highlighting the power of digital platforms for this tech-savvy generation."

Key insights from the survey reveal the following trends -

Stocks Over Traditional Investments : According to The Fin One study, 58% of young Indian investors currently allocate their funds to stocks, while 39% prefer mutual funds. In contrast, traditional investment options like fixed deposits (22%) and recurring deposits (26%) have lower adoption rates among this demographic. This trend suggests that young investors in India are adopting a balanced investment approach, aiming for a combination of high returns through stocks and mutual funds, while still seeking stable savings through more traditional, lower-risk options. The shift towards a diversified portfolio reflects the youth's growing financial literacy and their desire for both growth and security in their investments.

Mutual Funds : According to a survey conducted by an asset management company, index funds are more widely preferred by Gen Z and Millennials, with 46-48% of investors under 43 choosing them. This is in contrast to only 35% among Gen X and Boomers.

An Index Mutual Fund invests in a portfolio of stocks that mirror the composition of a specific stock market index such as the NSE Nifty or BSE Sensex. These are passively managed funds, meaning the fund manager aims to replicate the index's performance by investing in the same securities in the same proportions as those in the underlying index, without actively altering the portfolio. The primary goal of these funds is to provide returns that closely match the performance of the index they track, offering investors a cost-effective way to gain broad market exposure with minimal management intervention.

Indian index funds are based on gold, Nifty, Midcap index, etc. The Gen Z prefer index funds over ETFs for better returns and liquidity, comprising 46% of younger investors. A recent report by Axis AMC also highlighted the growing appetite for ETFs, which witnessed net sales of Rs 15,403 crore in October 2024.

Gold : Gen Z's approach to gold has evolved significantly, with digital gold and gold-backed securities emerging as popular investment choices. Gen Z is transforming gold investment trends by combining traditional value with modern convenience. Unlike previous generations, who typically purchased physical gold for adornment or as a symbol of social status, Gen Z is more focused on gold as an investment. This generation distinguishes between gold's roles as jewelry and investment and is turning to more flexible and accessible options like digital gold and gold-backed securities (such as Sovereign Gold Bonds and Gold ETFs). These investment vehicles offer the advantage of easy access, greater liquidity, and the ability to diversify portfolios, aligning with Gen Z's preference for convenience and financial growth. This shift reflects how Gen Z is blending tradition with modern investment opportunities.

Opportunities for improvement -
Gen Z who comprise 30% of the population are in the early stages of their financial journey, and while they have unique advantages, such as being digital natives with access to advanced financial tools, there are several areas where they could improve their approach to investments. The recent study conducted by Fin One on the Saving Habits Outlook 2024 revealed that, 93% of young Indians identify as consistent savers, with most allocating 20-30% of their monthly income for future financial goals. This trend is particularly strong in the 22-25 age group, reflecting an increasing awareness of financial discipline. Despite disciplined habits, 85% of respondents face challenges due to rising costs of living, including expenses for food, utilities, and transportation. The study also reveals that 68% tech savvy generation's reliance on digital platforms and technology solutions like automated savings tools and mobile apps help them manage their finances efficiently.

Key areas of improvement for Gen Z in overcoming financial pitfalls -

Enhancing Emergency Preparedness : Emergency preparedness addresses the concern that a significant portion of Gen Z (69%) is not adequately prepared for unexpected financial emergencies. This can include situations like job loss, medical emergencies, or urgent home repairs. The lack of an emergency fund, particularly one that covers at least six months' worth of living expenses in easily accessible liquid assets (such as a savings account), is a key vulnerability for Gen Z. In such a case it is crucial to keep some of your funds stashed away for emergency expenses. Setting up an automatic transfer to the savings every month, so that it happens not having to think about it or being tempted to spend it. In addition to a traditional savings account, it is a good idea to set up a fixed deposit account that offers higher returns (6% approx.) to help build an emergency fund for a long term perspective. However, one must keep in mind liquidity issues and penalty charges on early withdrawal while allocating funds to fixed deposits.

Improve Insurance Coverage : The statistic that 72% of Gen Z is underinsured in health coverage and 78% are underinsured in life insurance highlights significant gaps in their insurance protection. This underinsurance could leave many Gen Z individuals vulnerable in the event of unexpected health issues, accidents, or life events. Buying a life insurance is great way to ensure flow of income, financial security and wealth creation at an early age. Buying insurance is much simpler and more DIY for this generation with the advent of technology friendly apps. Life Insurance also alleviate financial instability, allowing one to focus on education, career, and personal growth, while also easing the repayment of debts and loans. Investing in health insurance and maintaining good health habits is crucial for Gen Z's long-term well-being. This helps avoid potential financial burdens from unexpected medical expenses and ensures the overall quality of life.

Minimize Credit Usage : Gen Z shows a concerning trend of over-reliance on credit, with 1 in 5 individuals having taken out a personal loan. Furthermore, 29% of Gen Z carry both personal loan and credit card debt, underscoring the need for more responsible borrowing practices. Responsible borrowing helps protect from the dangers of overwhelming debt and financial strain by safeguarding credit scores, ensuring timely access to credit, and maintaining a positive reputation as a borrower.

Balanced Asset Allocation : A balanced, diversified investment approach that includes both equity (for growth) and debt (for stability and liquidity) is recommended as an investment strategy for Gen Z. This strategy should be tailored to individual comfort levels and life circumstances, ensuring that investors are neither too risk-averse nor overly exposed to market fluctuations. Essentially, the goal is to make investments work for you without causing undue stress or jeopardizing financial security.

Go for Simple Investments : As advocated by Radhika Gupta, CEO of Edelweiss, the use of straightforward, easy-to-understand financial products are both effectiveand reasonable in financial planning. She believes that choosing simple investment options, such as mutual funds or index funds, doesn't diminish one's intelligence or financial acumen. In fact, sometimes complexity can lead to confusion and unnecessary risks. For Gupta, the best investment is a SIP into a balanced advantage fund and a mid/small cap fund.

Financial literacy and skill development : Many Gen Z individuals have access to financial tools but lack comprehensive knowledge about investing, which may lead to poor decision-making. Focus on building stronger foundational knowledge in areas like asset allocation, risk management, investment vehicles (stocks, bonds, ETFs, etc.), and the importance of long-term growth. Investing in educational resources, online courses, and using apps designed to teach investment principles can boost confidence and decision-making.

The way forward -

These insights indicate that while Gen Z has made progress in financial awareness and investing, they still face notable challenges in areas like emergency preparedness, insurance coverage, and debt management. By tackling these issues and offering focused financial education and resources, Gen Z can gain better control over their financial futures and confidently steer their financial journey.