By Ayush Jain (L&T MHPS Boilers)
When the terms ‘investment’, ‘stocks’, ‘shares’ or ‘mutual funds’ are heard or read, the instantaneous thought that comes to the mind, is that of something complicated and risky (as advertised), unless you’re a seasoned campaigner or have Finance as your work profile.
What we fail to consider is that by having idle money lying around, we are missing a great opportunity. When we think of investment, the conservative Indian mind-set generally thinks of Fixed Deposits, PPF, Savings accounts and Insurance schemes. While these may be risk-free, they do not offer any substantial returns on the sum invested.
I was of a similar mind-set, but it is important to realize the time value of money and hedge your risks to make an informed decision to invest your money. Instead of having a conservative portfolio, it is recommended to make diversified investments depending on your risk profile.
Mutual Funds are a great place to start!
So what are Mutual Funds?
Pool of funds collected from many investors for the purpose on investing in securities such as stocks, bonds, money market instruments and similar assets (collectively known as Assets Under Management abbreviated to
–AUM). Unlike stocks, mutual funds by virtue of AUM are less risk prone.
Types of Mutual Funds
- Equity oriented or Direct Equity Funds –For those who wear their hearts on their sleeves, these funds invest a portion (min. 65%) or fully into the stock market, offering a higher rate of return with a higher risk. If you should choose to invest in these funds, meticulous research must be done in selecting the fund to minimize the risk profile of
- Money market funds –These are relatively low risk, compared with other mutual funds and most other investments. By law, they are limited to investing only in specific high-quality, short-term investments issued by the state and local governments.
- Fixed Income Fund-These funds invest in corporate and government debt with the purpose of providing income through dividend payments. You can include them in your portfolio to boost the total return, by providing steady income when equity funds lose value.
Investment Options in Mutual Funds
Have little money to spare but risk-taking appetite is high? No Worries, SIPs are perfect option for you. Have a large sum not needed for the next 5 years- FMPs are the way to go. While these may seem jargons to you right now, the section below will give you crystal clear options to invest depending on your preference.
a) SIPs- Systematic Investment Plans
SIP is an option where you invest a fixed amount in a mutual fund scheme at regular intervals.
- Flexibility to invest small amounts every month
- Benefit from the power of 2 powerful investment strategies
- Rupee cost averaging – helps counter volatility
- Power of compounding – small investments create a big kitty over time
- No need to time the market
Example: Starting a monthly SIP of Rs. 5,000 into a stable mutual fund. In this way, you don’t have to invest large amounts and you can average out the cost of units by investing over a long period.
b) STPs- Systematic Transfer Plan
STP is a plan that where you can periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house.
- Consistent Returns-You can transfer your money to a target equity fund while you are invested in a debt or liquid fund. Therefore, you will get the returns of the equity fund you are transferring into and at the same time remain protected as a part of your investment remains in debt.
- Averaging of Cost
- Rebalancing Portfolio
Facilitates in rebalancing the portfolio by allotting investments from debt to equity or vice versa.
c) Systematic Withdrawal Plan (SWP) / Regular Withdrawal Plan (RWP)
An RWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals.
- Regular Income
- Avoids Market Fluctuations
d) FMP-Fixed Maturity Plans
FMPs are close-ended debt funds with a maturity period ranging from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component. The fundamental objective of FMPs is to provide steady returns over a fixed-maturity period, thus protecting investors from market fluctuations. They do not offer liquidity but are relatively safe and offer higher returns than Fixed Deposits.
Selecting a Mutual Fund
You may know what investment option you want go with. However, if you do not know which company/fund to invest in, it may spell doom for you. HDFC seems fine, or TATA will yield a good fortune? No need to act on hearsay or speculation, do your own research.
While selecting a fund, the following factors must be kept in mind:
- Beta Factor (Risk) – It measures the risk inherent to the entire market or an entire market segment. This type of risk is both unpredictable and impossible to completely avoid. This factor is available in the scheme related document of every fund.
- β<1 less volatile than the market
- β>1 more volatile than the market
- Needless to say, choose a fund depending on your risk tolerance.
- Volatility – How has the fund’s price varied over a given period? High volatility indicates higher risk and is an indicator of the stability of fund. Price variation trends are available every time to opt to buy any fund. Pick one with less volatility if your risk tolerance is low and vice versa.
- Past Performance – What return has the fund fetched over a period of 1, 3 or 5 years? Pick a fund with a higher rate of return over a long period (5 years).
- Liquidity – When does the fund allow you to withdraw tax-free return along with the principal amount? SIPs/Open-end schemes offer higher liquidity than close-ended FMPs (Fixed Maturity Plans) or debt funds. If you have idle money lying around which is not needed in the short run, go for close-ended schemes. Otherwise, open ended-schemes are better for a higher rate of return.
- Portfolio of the Fund-Go through AUM of the fund to see which all stocks/firms/bonds the fund manager invests in. Higher the stability of AUM, the more reliable the fund will be.
- Invest in a variety of mutual funds, ranging fromto low risk options like FMPs/debt funds to high-risk options like equity funds. Percentage of money invested in debt instruments should be higher if you have a low appetite for risk, but invest in both types to average out your returns.
- Bide your time. There will be losses, but do not fear when such a situation arises. Be patient and you will be rewarded. Build your corpus over the years and mutual funds are definite to earn you a good yield in the long run.
How can we be done without the mention of stock markets?
Stock markets are lucrative, can earn you big amounts within short periods but can also completely erode
- Invest in Blue-chip companies/firms, which are less risk prone. The company you work for could be a great place to start with! Even if their shares prices tank, these companies rebound within a reasonable period.
- Invest in IPOs – Initial Public Offerings of well-researched companies, which can give you good returns once they are well placed in the market. Not all IPOs are good to invest, so do your due diligence before you go ahead.
- Do not sell at the first sign of loss! Wait out your time, keep patience – decent performing stocks are bound to break even if kept for a long time.
That is all for now, folks! I am sure this information will hold you in good stead while investing your money. Do not let it idle away. Make your money earn more money for you.
The above article gives general guidelines on investing in markets. The writer shall bear no responsibility in case of any losses arising out of any investment.