We have many young, first-time investors, wanting to know where and how to make a start in building a fund portfolio. In this article, we will deal with investors starting a savings habit for the first time and wish to start investments in mutual funds.
The New Investor
If you have just started a career and wish to kick start some savings, then mutual funds can be a great way to do it systematically.
But then, if you are new to equity markets, then investing in equity mutual funds and experiencing any short-term volatility can spook you out of mutual funds, which otherwise make for great long-term products.
Hence, for an investor with little or no knowledge about equities, the following steps may make life easier:
– Consider making a start with debt-oriented products (such as MIPs), which offer 10-25% exposure to equities. This will provide a good entry point to equity investing.
– It is a misconceived notion that MIPs are only for those who look for monthly income. MIPs can be held with a growth option. Their simple aim is to generate debt-plus income, with the additional equities they hold. This may be a better option than going for a recurring deposit.
– Hold some surplus in liquid/ultra short-term funds to build an emergency fund, or if you would like to set aside some amount for your own spending ranging from buying a mobile, to going on a vacation, or for expenses incurred to apply for B-school a year or two later. Consider parking your incentives and bonuses in this kind of contingency fund. You can always shift this money to other investment avenues later. It is likely that it will be spent if it remains in your savings account.
– In about a year’s time, you can gradually add balanced funds which will offer 75% exposure to equities (and the rest in debt) and then a year from then, start off with diversified equity funds with a large-cap exposure. Again, use only the SIP route.
– At this point, you can start considering tax-saving mutual funds as well, for your Section 80C benefits. Until then, use other tax options such as PPF, EPF and some basic term insurance and medical insurance for your tax benefits.
– By the time you are over 3 years into your career, you may start having specific goals such as saving to buy a property, upgrading your lifestyle with consumer durable products, saving for your own marriage, or investing for your retirement or for your family’s needs such as child’s education.
At this juncture, you can have a well allocated portfolio of equity and debt funds. This may have liquid/ultra short-term funds for short-term requirements and a combination of equity and income funds for long-term goals.
Please note that you may even begin this whole process with a good asset allocation strategy, if you already have fixed goals in mind, have an idea on how to go about it, or have the right guidance. Otherwise, the above will be a more phased approach.
The biggest advantage with mutual funds is that it allows you to ride different asset classes (equity, debt, gold) using the same vehicle. Hence, it becomes easy for you to have an asset-balanced approach once you start investing towards specific goals.
Not New To Equities
But if you are one of those young investors acclimatized with the equity markets while you were a student, then it is that much easier for you to start off with equity mutual funds. Since your job may not allow you to spend too much time tracking stock markets, mutual funds could be a good platform to invest in the markets. In this case:
But there may be some baggage that you may be carrying from your equity investing/trading days that you need to shed, if you are making a start with mutual funds.
One, there can be no trading business in equity funds. It follows that equity funds are meant for the long term. The longer the better. Think in multiples of 5, if you can, when you think of equities.
Two, lower NAV does not mean a fund is cheap. NAVs are nothing but the current unit value of the money managed by the fund. It is the return potential from the point you invest, that matters.
Three, you may have booked profits in stocks or exited them when you made your money. You don’t have to do that in mutual funds because the fund manager is constantly churning the portfolio, booking profits and entering new opportunities on your behalf.
That means he/she is actively managing your portfolio. Hence, avoid constant chasing of returns and churning of funds. Resort to selling if you have the following reasons: One, you are exiting simply because you need the money at that point or are nearing your goal. Two, the fund has been consistently underperforming its benchmark and peer group for several quarters. Three, when you do portfolio rebalancing.
To sum up, as a young investor, invest systematically, take on equities in a phased manner to help achieve long-term goals and use debt judiciously to counter equity volatility. Gold, will remain an option, if you wish to use it as a diversifier.
Happy investing!
The New Investor
If you have just started a career and wish to kick start some savings, then mutual funds can be a great way to do it systematically.
But then, if you are new to equity markets, then investing in equity mutual funds and experiencing any short-term volatility can spook you out of mutual funds, which otherwise make for great long-term products.
Hence, for an investor with little or no knowledge about equities, the following steps may make life easier:
– Consider making a start with debt-oriented products (such as MIPs), which offer 10-25% exposure to equities. This will provide a good entry point to equity investing.
– It is a misconceived notion that MIPs are only for those who look for monthly income. MIPs can be held with a growth option. Their simple aim is to generate debt-plus income, with the additional equities they hold. This may be a better option than going for a recurring deposit.
– Hold some surplus in liquid/ultra short-term funds to build an emergency fund, or if you would like to set aside some amount for your own spending ranging from buying a mobile, to going on a vacation, or for expenses incurred to apply for B-school a year or two later. Consider parking your incentives and bonuses in this kind of contingency fund. You can always shift this money to other investment avenues later. It is likely that it will be spent if it remains in your savings account.
– In about a year’s time, you can gradually add balanced funds which will offer 75% exposure to equities (and the rest in debt) and then a year from then, start off with diversified equity funds with a large-cap exposure. Again, use only the SIP route.
– At this point, you can start considering tax-saving mutual funds as well, for your Section 80C benefits. Until then, use other tax options such as PPF, EPF and some basic term insurance and medical insurance for your tax benefits.
– By the time you are over 3 years into your career, you may start having specific goals such as saving to buy a property, upgrading your lifestyle with consumer durable products, saving for your own marriage, or investing for your retirement or for your family’s needs such as child’s education.
At this juncture, you can have a well allocated portfolio of equity and debt funds. This may have liquid/ultra short-term funds for short-term requirements and a combination of equity and income funds for long-term goals.
Please note that you may even begin this whole process with a good asset allocation strategy, if you already have fixed goals in mind, have an idea on how to go about it, or have the right guidance. Otherwise, the above will be a more phased approach.
The biggest advantage with mutual funds is that it allows you to ride different asset classes (equity, debt, gold) using the same vehicle. Hence, it becomes easy for you to have an asset-balanced approach once you start investing towards specific goals.
Not New To Equities
But if you are one of those young investors acclimatized with the equity markets while you were a student, then it is that much easier for you to start off with equity mutual funds. Since your job may not allow you to spend too much time tracking stock markets, mutual funds could be a good platform to invest in the markets. In this case:
- Start off with a basket of diversified funds and slowly take some exposure (up to a third) to mid-cap funds.
- If you wish to play any specific sectors, use your familiarity in the stock market to pick stocks directly in such a sector, instead of going for a sector fund.
- Actively consider allocating some money to debt funds so as to have an asset balanced portfolio. This will come to your rescue in times of a bear onslaught. You may like to note that even a 5-year equity portfolio is not immune from bear markets and can generate negative returns, especially if you invested a lot in the peak. Debt allocation acts as shock absorbers then.
- A contingency fund is also a must here if you do not already have one.
One, there can be no trading business in equity funds. It follows that equity funds are meant for the long term. The longer the better. Think in multiples of 5, if you can, when you think of equities.
Two, lower NAV does not mean a fund is cheap. NAVs are nothing but the current unit value of the money managed by the fund. It is the return potential from the point you invest, that matters.
Three, you may have booked profits in stocks or exited them when you made your money. You don’t have to do that in mutual funds because the fund manager is constantly churning the portfolio, booking profits and entering new opportunities on your behalf.
That means he/she is actively managing your portfolio. Hence, avoid constant chasing of returns and churning of funds. Resort to selling if you have the following reasons: One, you are exiting simply because you need the money at that point or are nearing your goal. Two, the fund has been consistently underperforming its benchmark and peer group for several quarters. Three, when you do portfolio rebalancing.
To sum up, as a young investor, invest systematically, take on equities in a phased manner to help achieve long-term goals and use debt judiciously to counter equity volatility. Gold, will remain an option, if you wish to use it as a diversifier.
Happy investing!
Reviewing your mutual portfolio is like a GPS tracker in a car. It ensures that you stay on track. Just as a car needs periodic maintenance and servicing, mutual funds portfolios also demand your attention.
Consider the following points to understand the importance of reviewing your mutual fund portfolio.
Goals Change
As you move ahead, your financial goals change. Factors like inflation, changes in the standards of living, addition of financial dependents, and lead you to add, alter or drop certain goals. For example, if you started your financial planning at 25 years of age, you might not have planned your goals related to children's education, their marriage, your travel aspirations, post-retirement life and more. Hence, the mutual fund portfolio needs to be revisited and realigned to include the new and updated goals.
Based on the new goals, you might need to start investing more. In addition, the extent of debt and equity exposure can depend upon your age while the amount to be invested can be estimated based on your increased income and savings.
Peer Performance
A periodic review can help you compare the performance of your funds with similar funds in the industry as well as the benchmark index for that type of fund.
You can also compare the performance of your fund with your initial predictions to check if your have been receiving the returns you planned for.
In case your fund is not performing as per your expectations, remedial steps need to be undertaken for modifications, additions or discontinuance.
Maintain Diversification
One must also periodically review the mutual fund portfolio to ensure that the money is diversified across sectors and themes. Review the underlying stocks that your mutual funds are investing in. Check if there is duplication of stocks among funds. However, remember that over-diversifying can be counterproductive as you spread the investments too thin.
Ensure Long-Term Investment
Remember that investing in mutual funds is like playing a Test cricket match and not a Twenty 20 game. Perseverance and measured risk taking is what will win you matches – in this case lucrative returns. While reviewing your portfolio, be patient. Understand that as long as the fundamentals are sound, long-term returns will most likely be positive. Every investment idea has its own timeframe; its performance should be critically evaluated only after this timeframe.
Manage Short term Fluctuations
Mutual funds carry market risks. Do not let short term fluctuations deter you. React only to proven macro-economic trends if they are negatively influencing your portfolio. Once you find the optimal balance in your portfolio, its performance has to be reviewed and fine-tuned periodically. Annual performance evaluation is the norm in the industry however; people do review their mutual fund portfolio on half-yearly and quarterly basis as well.
Thus, review your mutual fund portfolio from time-to-time, calculate, diversify, make long-term investments and analyse performance for productive return on investment.
Consider the following points to understand the importance of reviewing your mutual fund portfolio.
Goals Change
As you move ahead, your financial goals change. Factors like inflation, changes in the standards of living, addition of financial dependents, and lead you to add, alter or drop certain goals. For example, if you started your financial planning at 25 years of age, you might not have planned your goals related to children's education, their marriage, your travel aspirations, post-retirement life and more. Hence, the mutual fund portfolio needs to be revisited and realigned to include the new and updated goals.
Based on the new goals, you might need to start investing more. In addition, the extent of debt and equity exposure can depend upon your age while the amount to be invested can be estimated based on your increased income and savings.
Peer Performance
A periodic review can help you compare the performance of your funds with similar funds in the industry as well as the benchmark index for that type of fund.
You can also compare the performance of your fund with your initial predictions to check if your have been receiving the returns you planned for.
In case your fund is not performing as per your expectations, remedial steps need to be undertaken for modifications, additions or discontinuance.
Maintain Diversification
One must also periodically review the mutual fund portfolio to ensure that the money is diversified across sectors and themes. Review the underlying stocks that your mutual funds are investing in. Check if there is duplication of stocks among funds. However, remember that over-diversifying can be counterproductive as you spread the investments too thin.
Ensure Long-Term Investment
Remember that investing in mutual funds is like playing a Test cricket match and not a Twenty 20 game. Perseverance and measured risk taking is what will win you matches – in this case lucrative returns. While reviewing your portfolio, be patient. Understand that as long as the fundamentals are sound, long-term returns will most likely be positive. Every investment idea has its own timeframe; its performance should be critically evaluated only after this timeframe.
Manage Short term Fluctuations
Mutual funds carry market risks. Do not let short term fluctuations deter you. React only to proven macro-economic trends if they are negatively influencing your portfolio. Once you find the optimal balance in your portfolio, its performance has to be reviewed and fine-tuned periodically. Annual performance evaluation is the norm in the industry however; people do review their mutual fund portfolio on half-yearly and quarterly basis as well.
Thus, review your mutual fund portfolio from time-to-time, calculate, diversify, make long-term investments and analyse performance for productive return on investment.
Mutual funds are investment vehicles that pool money from many different investors for the purpose of investing in securities such as stocks, bonds and money market instruments. Broadly, mutual funds can be classified based on their maturity period and their investment objective.
Let's understand three different types of mutual funds that are based on the maturity period.
1. Open-ended fund: An open-ended mutual fund is a fund that is available for subscription on a continuous basis and can be redeemed anytime.
2. Close-ended fund: A close-ended mutual fund is a fund that has a defined maturity period, e.g., 3-6 years. These funds are open for subscription for a specified period at the time of launch.
3. Interval funds: Interval funds combine the features of open-ended and close-ended mutual funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals.
Now let's understand various types of mutual funds that are based on the investment objective.
1. Equity funds: These mutual funds invest a major part of their corpus in stocks and the investment objective of these funds is long-term capital growth. These funds may invest in a wide range of industries. These mutual funds are suitable for investors with a long-term outlook.
2. Debt and money market funds: Debt mutual funds generally invest in securities such as bonds, corporate debentures, government securities and money market instruments. These mutual funds are likely to be less volatile than equity funds and produce regular income.
3. Balanced funds: Balanced mutual funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These mutual funds may be ideal for investors looking for a combination of income and moderate growth
4. Equity linked savings scheme (ELSS): Tax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities. These funds have a lock-in period of 3 years as defined by Income Tax laws
5. Thematic funds: Thematic funds are equity schemes which invest in a set of sectors that are closely related to a particular theme like infrastructure. Unlike sector funds, thematic funds have a broader spectrum to operate in.
How to fulfil your dreams through SIPs?
In this article, we will help you understand Systematic Investment Plans or SIPs as they are popularly called. A systematic Investment Plan (SIP) is a method of investing a fixed sum on a regularly, in a mutual fund scheme.
Let us look at the features of Systematic investment plan and analyse how it helps you fulfil your investment objectives and financial goals.
Key features of a SIP:
1. Disciplined approach to investment: SIPs help you inculcate a regular saving habit as they require you to invest a fixed sum of money on a regular basis. Investing regularly in small amounts can often lead to better results than investing in a lump sum. Disciplined approach towards investing also leads to wealth accumulation. Thus, SIPs also help you take a step ahead towards achieving your financial goals and meeting investment objectives.
2. Flexibility: SIPs offer you the flexibility to select an amount that you intend to invest. SIP is a simple, convenient and affordable way to invest for your future with as little as Rs 500 every month. Also, there is no penalty for missing out on any investment in a particular month. Moreover, easy modifications are allowed in a SIP as and when you desire.
3. No need to time the market: Investors aiming to time the market have failed time and again in the past. Trying to time the market is a time consuming and a risky task. Through a SIP, you have the option to invest regularly in equity markets irrespective of the bull and bear phases.
4. Great investment tool for goal planning: SIP is a perfect tool for people who have a specific, future financial goal. By investing a specific amount every month; you can plan for and may be able to meet your financial goals - be it your child's education or wedding or for a comfortable retired life.
5. Rupee cost averaging: By investing a fixed amount every month, you may be able to pick up more units when the prices are low and vice a versa so that over a period of time acquisition cost per unit may come down. This is called rupee cost averaging.
To sum it up, SIPs help you inculcate a regular saving habit to invest efficiently and fulfil your short term and long term financial goals.
Let's understand three different types of mutual funds that are based on the maturity period.
1. Open-ended fund: An open-ended mutual fund is a fund that is available for subscription on a continuous basis and can be redeemed anytime.
2. Close-ended fund: A close-ended mutual fund is a fund that has a defined maturity period, e.g., 3-6 years. These funds are open for subscription for a specified period at the time of launch.
3. Interval funds: Interval funds combine the features of open-ended and close-ended mutual funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals.
Now let's understand various types of mutual funds that are based on the investment objective.
1. Equity funds: These mutual funds invest a major part of their corpus in stocks and the investment objective of these funds is long-term capital growth. These funds may invest in a wide range of industries. These mutual funds are suitable for investors with a long-term outlook.
2. Debt and money market funds: Debt mutual funds generally invest in securities such as bonds, corporate debentures, government securities and money market instruments. These mutual funds are likely to be less volatile than equity funds and produce regular income.
3. Balanced funds: Balanced mutual funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These mutual funds may be ideal for investors looking for a combination of income and moderate growth
4. Equity linked savings scheme (ELSS): Tax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities. These funds have a lock-in period of 3 years as defined by Income Tax laws
5. Thematic funds: Thematic funds are equity schemes which invest in a set of sectors that are closely related to a particular theme like infrastructure. Unlike sector funds, thematic funds have a broader spectrum to operate in.
How to fulfil your dreams through SIPs?
In this article, we will help you understand Systematic Investment Plans or SIPs as they are popularly called. A systematic Investment Plan (SIP) is a method of investing a fixed sum on a regularly, in a mutual fund scheme.
Let us look at the features of Systematic investment plan and analyse how it helps you fulfil your investment objectives and financial goals.
Key features of a SIP:
1. Disciplined approach to investment: SIPs help you inculcate a regular saving habit as they require you to invest a fixed sum of money on a regular basis. Investing regularly in small amounts can often lead to better results than investing in a lump sum. Disciplined approach towards investing also leads to wealth accumulation. Thus, SIPs also help you take a step ahead towards achieving your financial goals and meeting investment objectives.
2. Flexibility: SIPs offer you the flexibility to select an amount that you intend to invest. SIP is a simple, convenient and affordable way to invest for your future with as little as Rs 500 every month. Also, there is no penalty for missing out on any investment in a particular month. Moreover, easy modifications are allowed in a SIP as and when you desire.
3. No need to time the market: Investors aiming to time the market have failed time and again in the past. Trying to time the market is a time consuming and a risky task. Through a SIP, you have the option to invest regularly in equity markets irrespective of the bull and bear phases.
4. Great investment tool for goal planning: SIP is a perfect tool for people who have a specific, future financial goal. By investing a specific amount every month; you can plan for and may be able to meet your financial goals - be it your child's education or wedding or for a comfortable retired life.
5. Rupee cost averaging: By investing a fixed amount every month, you may be able to pick up more units when the prices are low and vice a versa so that over a period of time acquisition cost per unit may come down. This is called rupee cost averaging.
To sum it up, SIPs help you inculcate a regular saving habit to invest efficiently and fulfil your short term and long term financial goals.
Mutual funds are great investment vehicles to channelize your funds to achieve your financial goals. It is a collective fund of pooled investment of the likeminded and has several types of fund schemes to offer. Open ended mutual fund offers ease of liquidity and is quite famous amongst investors. But before you choose your mutual fund scheme know well the policy/scheme details
Mutual funds, as we all know, are a pool of capital by several investors sharing common financial goals. The investors here can be any entity, be it individuals, firms or other financial institutions. It is this collective fund that is accumulated and invested in diversified manner. To further manage well these funds, there are fund managers who then park your money into different investment kinds like stocks, equity bonds, etc. The idea of spreading out money into different sorts of money market instruments helps in risk reduction. So in times when one investment is not faring well, the other might do well and keep your returns balanced. And thus, the returns earned are divided and distributed amongst the investors basis their initial contribution.
Coming down to classification of Mutual Funds, which depend on several norms say the nature of investment, risk involved, periodicity of payout or time of closure. When talking about time of closure there are 2 types namely, open ended mutual funds and closed ended mutual funds. To state it out rightly the difference between the two is based on the flexibility of sale and purchase of fund units. So, while in open ended mutual funds investors can issue or redeem units anytime as per their convenience, in closed ended ones the unit capital is fixed and sale of only specific numbers is allowed.
Due to the available flexibility in case of open ended mutual funds, the unit capital keeps varying and the fund witnesses an expansion in size. However in case the management can’t handle and optimize a large size of funds, it can easily put a halt to subscriptions. Whereas in closed ended fund a buying and selling happen through recognized stock exchanges, where the units of the schemes has been listed. But to allow the investors to exit, the fund can list their closed ended scheme on a stock exchange.
While in open ended mutual funds there is much liquidity available and the investors can buy or sell units at Net Asset Value (NAV) declared on daily basis. On the other hand in closed ended funds the subscription is open only during specified period and the exit options are also restricted, these funds don’t see a sudden redemption on a regular basis. The fund managers also stay at ease for the closed ended funds are comprehensive, so whenever you invest in mutual funds, read you scheme document clearly. And in case you are not sure of which scheme to go for, take assistance from investment advisor.
Mutual funds, as we all know, are a pool of capital by several investors sharing common financial goals. The investors here can be any entity, be it individuals, firms or other financial institutions. It is this collective fund that is accumulated and invested in diversified manner. To further manage well these funds, there are fund managers who then park your money into different investment kinds like stocks, equity bonds, etc. The idea of spreading out money into different sorts of money market instruments helps in risk reduction. So in times when one investment is not faring well, the other might do well and keep your returns balanced. And thus, the returns earned are divided and distributed amongst the investors basis their initial contribution.
Coming down to classification of Mutual Funds, which depend on several norms say the nature of investment, risk involved, periodicity of payout or time of closure. When talking about time of closure there are 2 types namely, open ended mutual funds and closed ended mutual funds. To state it out rightly the difference between the two is based on the flexibility of sale and purchase of fund units. So, while in open ended mutual funds investors can issue or redeem units anytime as per their convenience, in closed ended ones the unit capital is fixed and sale of only specific numbers is allowed.
Due to the available flexibility in case of open ended mutual funds, the unit capital keeps varying and the fund witnesses an expansion in size. However in case the management can’t handle and optimize a large size of funds, it can easily put a halt to subscriptions. Whereas in closed ended fund a buying and selling happen through recognized stock exchanges, where the units of the schemes has been listed. But to allow the investors to exit, the fund can list their closed ended scheme on a stock exchange.
While in open ended mutual funds there is much liquidity available and the investors can buy or sell units at Net Asset Value (NAV) declared on daily basis. On the other hand in closed ended funds the subscription is open only during specified period and the exit options are also restricted, these funds don’t see a sudden redemption on a regular basis. The fund managers also stay at ease for the closed ended funds are comprehensive, so whenever you invest in mutual funds, read you scheme document clearly. And in case you are not sure of which scheme to go for, take assistance from investment advisor.