Read a good post here and and sharing some of the thoughts therein for new investors in mutual funds
The contents of this post are subject to the following assumptions:
- The investment would be used for financial independence later in life and that there is no other goal in the horizon.
- Basic fortifications like emergency fund, life insurance (if there are dependents), health insurance (for parents and self) are in place.
- The young earner understands the importance of equity exposure
There are several articles on what a mutual fund is, different types of mutual funds, how to invest in direct mutual funds etc. So I choose not to reinvent the wheel here.
Direct Equity vs. Equity Mutual Funds
Personally I think there is absolutely no need for an individual ( young or old) to invest in direct equity. Equity mutual funds if held onto for a long enough period of time, is more than likely to beat inflation and even give you a little extra after expenses.
Perhaps one can hasten financial independence with direct equity exposure but such a path is fraught with peril.
That said, in my uninformed opinion, gradually accumulating and holding solid large cap companies instead of chasing multi-baggers is a decent way to ‘create wealth’.
Naturally one must learn how to choose a solid business before taking the plunge. Since this would take a while, I suggest the following:
1) Start a SIP in a single large and mid-cap fund
2) If you need to save tax, use an ELSS fund - tax saving mutual fund. Just use ELSS + EPF + Term insurance premium (if applicable) for tax savings.
Personally I dont do SIP in ELSS funds (because getting rid of a poor performer would seem like forever). If you are okay with it, go for it. Just be sure to discontinue the SIP (and switch to another fund) after your EPF exceeds the 80C limit.
3) If you don’t care for direct equity, then that is all that you need to do!
- As and when you get extra cash, buy more units Either in the ELSS fund (if you have not exhausted 80C limits) or in the large and mid-cap fund.
- Do not monitor the value of your investment every day! Monitor only how much you invest
4) If you wish to get into direct equity, then obviously you must learn. There are many useful resources. I prefer:
tyroinvestor.com and stableinvestor.com and the resources mentioned in them.
tyroinvestor.com and stableinvestor.com and the resources mentioned in them.
These are written by passionate youngsters who are learning on the fly and do not hold anything back. I would prefer to learn from them any day compared to an ‘expert’ who runs a business.
We have a lifetime to learn and invest in equities. So there is no flaming hurry. Get the mutual fund investment going, learn in leisure and invest when you feel comfortable and ready.
DIY vs. Professional Help
While a young earner is best suited for DIY (do it yourself), taking professional help and then learning in one owns pace is also a fantastic idea.
Young earners are often under a lot of stress. So professional help could help calm nerves and enable them to focus on their career better.
Young earners are often under a lot of stress. So professional help could help calm nerves and enable them to focus on their career better.
I would recommend starting a relationship with a fee-only planner.
The learning cannot be skipped!
Regular plans vs. Direct plans
If you employ the services of an IFA or use online distribution portals, think of the trail commission that you can save in direct plans as a fee for service or value adds.
If the features of an online portal are effectively used, then there is no need to lose sleep over being in regular plans.
DIY investing need not be 100% DIY. Someone who uses an intermediary for investments but handles other aspects of goal-based investing on their own (monitoring, tracking investments, rebalancing etc.) are also DIY investors.
Yes, I am an investor in direct plans and promote them every time I get an excuse.
More than time, effort etc. direct plan investing requires confidence. If you think you can confidently pick funds and manage your folio, go direct.
Else
1) either seek counsel from a fee-only planner and go direct or
2) go regular and be happy with your choice.
Else
1) either seek counsel from a fee-only planner and go direct or
2) go regular and be happy with your choice.
At the cost of repeating myself, either way the learning cannot be skipped!
Trust the planner or IFA. Do not post their recommendations in forums for ‘double-checking’.
Finally,
- Never ever buy mutual funds from a bank.
- Do not buy an NFO because it is an NFO.
- Do not buy/sell a fund because others are talking highly/lowly about it.
- Do not clutter your portfolio. Choose a minimalist portfolio.
To sum it up, choose ONE fund, invest with discipline. Do not look the folio value for at least 5 years. In the meanwhile learn about stock investing, if you must. Seek professional advice and not free lunch if you lack confidence.
