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When it comes to investments, the word ‘Tips’ is an overused and an over abused one. But in this post, I try to distil down some thoughts (or call them tips if you prefer 😉 ) for the young investors of mutual funds.
And why do I want to offer these tips for mutual funds investors and that too who are the young Millennials?
Because in recent past and thanks to aggressive campaigns by mutual fund houses and regulators and ofcourse those selling mutual funds, there has been a rise in interest in these investment vehicles. And unfortunately, many agents, distributors (who wrongly call themselves advisors), bank relationship managers and those giving free financial advice end up overpromising and overcommitting what these mutual fund investments can do and cannot do.
So this list of tips is a sort of what’s right and what isn’t and what you as a mutual fund investor should know of:
So here we go:
- First a bit of common advice – irrespective of whether you want to go for mutual fund investment or some other investment, always invest with a goal in mind. Aligning your investments to goals helps you stay on track, be in control and clearly understand how much you have saved up for each of your financial goals. This is the extremely helpful concept of Goal-based Investing that is intuitive and gaining a lot of interest these days.
- Those who invest randomly here and there and for stupid reasons like ‘just to save tax’ are doing themselves a disservice by not managing their money properly.
- Mutual funds allow you to invest in various assets like equity, debt and gold. So there are several types of mutual funds and hundreds/thousands of individual schemes. Atleast when it comes to equity mutual funds, it is best to have a long term view. Because equity as an asset class is best suited for long term investment. It may give good returns in the short term as well. But due to the very nature of equity and how the short term returns can fluctuate, you should be willing to stick around for long enough to get good average returns.
- And being a millennial, you have decades in front of you. Right? So you need to and actually can think about the really long term.
- Now, how many equity funds should you be investing in? For starters when you can only spare a small amount for investing in mutual funds, you can start with just 1 or 2 funds. As your income increases and so does your investment capability, you can add more funds to your mutual fund portfolio. It is said that 4-5 funds are good enough and provide proper diversification. Anything more (atleast for a not-so-large portfolio) wouldn’t help much – neither from a diversification perspective nor returns perspective.
- Which mutual funds to choose? The answer ideally will depend on the kind of investor you really are from amongst – super defensive, conservative, balanced, moderately aggressive, super aggressive. Assuming you are somewhere in the middle, i.e. in the balanced category – If you are investing for the near term (less than 3 years), do not invest in equity funds. Go for debt funds. If you are investing for short term (3-5 years), it is still advisable to have a major chunk in debt funds and just a small part in equity funds. For medium-term horizon like 5 to 10 years, you can have equal amounts of equity and debt (or can even have slightly higher equity part). And for really long term goals like those which are 10+ years away, best to have a major part invested in equity funds and a small part in debt funds.
- Now comes to the task of choosing the actual funds in equity and debt funds space. Please for heaven’s sake do not randomly pick funds or rely blindly on the advice of your colleagues or friends. To put it simply, stick with funds have done well not just in last 1-2 years but have performed well consistently over the long term. Ideally, the fund should have proven its mettle across the cycle and be amongst atleast the top 25% of its category for the last several years. Do not blindly invest in last year’s table toppers. It generally doesn’t work and the past winners cannot guarantee a win next year or years thereafter. You should also check other factors like rolling returns, risk ratios, expense ratios, fund manager’s ability to deliver on what is being promised, comparative performance in peer-group and category and with respect to the chosen benchmarks. You may also check star ratings but again, do not trust mutual fund star ratings blindly. I know all this may sound complicated if you are just starting. But this is the right way to do it. And if you feel you need help, its best to consult an investment advisor.
- Should you wait to invest when markets are falling so that you can get mutual fund units at a lower price? Ideally, that is a perfect way. But the problem with this approach is that you never know when markets will fall and this wait may be of years. So you will miss out the returns of rising markets in the years in between. Therefore if you are investing for long term goals in equity funds, it is best to do regular investing via SIPs. A small amount invested periodically can create a lot of wealth in the long run. There are many SIP success stories to take inspiration from.
- Most investors of equity funds start small. Like they start with a SIP of Rs 1000 or SIP of Rs 5000. But over the years, the income also increases. So you should always try to increase your regular investment in mutual funds at least at a rate equal to your income hikes. So let’s say you start with Rs 5000 per month in the first year. In next year or so, you should aim to increase it to Rs 6000 monthly or more and Rs 7-8000 in the next year.
- After you have begun investing and you have begun to accumulate a small corpus, you should become serious about monitoring your MF investments as well. You should keep track of how well your investments are performing. But it is not required to be done very frequently. Reviewing your investments once in a while (like once a year) is all that is required. This way, you can remove non-performing funds and replace them with ones which have better potential to deliver your expected results.
- A lot of people are under the myth that you cannot lose money if you invest in mutual funds through SIPs. This is not true. SIP simply averages out your investment across time. Many also feel that simply running a SIP is not the perfect strategy for investing. I don’t deny that as aiming to perfectly time the market entries and exit is what is supposedly glamorous and ofcourse profitable. But realistically speaking, most people are not good timers (leave alone perfect). So their best bet is to take the systematic route of SIP investing in mutual funds which has a good probability of delivering decent and acceptable returns.
That is enough for this post. 🙂
But if you still have doubts about whether you should even be investing in mutual funds or not, let me remind you that unlike previous generations which had some level of social security via pension, etc. to take care of them later in life, us millennials have none.
We are on our own. It is our responsibility to ensure that we save and invest properly for all our goals.
So think about it.