Don't think this is 'gyaan' on mutual fund investment. Rather it will help you build a future platform for wealth creation.
Read this only if you are a beginner, who thinks mutual fund is a riskier asset class and it takes time to make money. And think that investments made in mutual funds have to be constantly monitored.
The three most common reasons why beginners don't invest into mutual funds are:
1. Lack of time: I will have to regularly monitor my investments and I don't have that much time.
2. Lack of resources: I don't have access to research reports and I don't know which fund to choose.
3. Lack of knowledge: I don't know anything about mutual funds. How can I make money?
If you're a beginner, then chances are all these thoughts have crossed your mind. This article hopefully can clear all your doubts.
Answers to the three questions
1. Lack of time: I will have to regularly monitor my investments and I don't have that much time. If you are a long-term investor then monitoring your portfolio once or twice a year makes sense. One doesn't need to monitor their portfolio on a daily/monthly basis.
2. Lack of resources: I don't have access to research reports and I don't know which fund to choose. Many advisories have research desk that prepares reports for investors, so that they come to know which funds to buy and which ones to avoid. They do so to help out the investors, so that they don't end up making losses. All you need is Rs 2,000 a month to invest.
3. Lack of knowledge: I don't know how; it's too complicated! There are a lot of companies, financial institutions and web sites that help you learn all about mutual funds, so that you can invest without any stress.
But before we get into the process, let's understand that the portfolio we have built here is a simple one for the beginners: It'll help the beginners to understand the very first step of investing from a portfolio point of view, which to me is a more systematic and consistent way of investing.
For SIPs, the minimum initial investment for most mutual funds is Rs 1,000 per month. However, some funds houses have lowered their monthly amount to Rs 500.
So here are the 3 simple steps.
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STEP 1: Choose an equity fund
Choose an equity fund depending upon your risk appetite -- large cap, mid cap or multi cap. Always buy quality funds which have performed over the years. Although past performance do not qualify that it will generate the same return in the current situation also, it gives a clear idea about how the fund had performed in prior years. The other factor to look into is expense ratio.
Expense ratio is the expense that an investor has to pay the fund house on a yearly basis. This charge is deducted from the value of the mutual fund. Expense ratio is the expenses that the fund incurs, including management fee, administration and transaction costs, and marketing.
The lower the expense ratio, the better it is for you, because you pay less.
Volatility is a part of equity market and there are frequent ups and downs associated with the market. Equity markets have the potential to generate superb returns. If one looks closely then it can be seen that equity markets have performed well over a longer period of time.
Step 2: Select a debt fund
Why debt fund is the next question that must be lingering in your mind. Debt fund and equity fund are weakly correlated. It has been witnessed that when equity markets are in a bull run then debt markets somehow underperform and when equity markets go through a bear phase, then debt markets tend to outperform them.
So, by investing into both the categories you are in a win-win situation, which will allow you to get the better of both the two markets.
Step 3: Start a SIP with Rs 2,000 in the two selected funds
And that's all you have to do from your side. Take a back seat and forget about your investments for some time.
You're now probably beginning to feel a little skeptical at how simple it is: two funds, one portfolio, a modest amount of Rs 2,000 in monthly investment etc. You must be thinking how this works.
Well let's see the magic of compounding then. Let us take our investment horizon to be of 60 months (5 years). We will invest Rs 1,000 every month in both the funds. For the sake of simplification let us expect that the BSE Sensex and debt market will give an annualised return of 15 per cent and 8 per cent respectively.
By looking at the above table you can easily see that your modest SIP amount has given you decent returns.
Remember, this is just a start for beginner-investors who want to get in to the mutual fund industry. This portfolio will give you a taste of what to expect when investing.
This is a far better approach towards investing for beginners, rather than speculative investments made in equity markets. Start initially with a descent amount, get some experience, know how to invest profitably and be rich.
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