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1) Why Mutual Fund?
First you have to understand difference between saving & investing. Any asset class (Like FD, Gold, Real estate, Stocks, Mutual Funds etc.) that can beat inflation & give minimum 2% post-tax return above inflation, only that can be considered as Investing all other are considered as saving only & not investing.
Only few assets can beat the inflation & give better return in long term & Mutual fund is one of them.
Mutual fund is one of the most transparent system in India Vs. other products like ULIP which has many hidden T&C, charges which majority of people are unaware.
2) Type of mutual fund
a) Equity (large, mid, small, multicap, thematic, ELSS): Basically these funds invest in stock market. Let’s see risk & expected return (Only to give rough idea about expected return if consistently invested for minimum 5 to 10 years) involve in each of this.
Large Cap Fund: They invest in large cap companies like Reliance, TCS, HDFC etc. Low risk, low return (around 10-12% return)
Mid cap Fund: They primarily invest in Mid cap companies like Jubilant food, MRF, Apollo hospitals etc. Medium risk, medium return (around 12-15% return)
Small cap Fund: They primarily invest in small cap companies. High risk, High return (It can be upto 20% or more but similarly negative side also) – Not at all advisable for newcomers, retire person or for smaller tenure of less than 5 years as rally is highly cyclical & possible to give poor return for longer duration like 2018 till now.
Multicap Fund: Large + Mid + Small cap = Multicap. Low to medium risk & same kind of return
Flexicap Fund: Recently SEBI gave permission to it. It is similar to multi cap without restriction to invest minimum % in each scheme unlike Multicap fund.
Thematic: Like FMCG, IT, banking, Pharma, Infra, PSU fund etc. – Totally avoid for beginner unless u can predict next booming sector
ELSS: Tax saving fund with 3 years locked-in period. Best instrument for taking benefit of 1.5 lac under section 80C. Mostly they are large cap oriented fund. So consider risk, reward accordingly.
b) Debt (Liquid, ultra short term & many more):
These funds are not influenced by prices of Stock market. So, even if stock market tanks 50%, by general it doesn’t affect Debt Fund’s return. They are actually more sensitive to interest rate change. Basically their business is like lending to companies at fixed interest rate. It can give u superior return then ur bank FD However remember these are not 100% secure as ur bank FD.
Check Image attached to understand more about different Debt funds available.
c) Hybrid (Equity + Debt): It reduces risk due to component of debt fund but also reduces return in long run. Expect around 8-10% return.
d) Gold Fund: Invests only in Gold. It’s Better to invest in gold fund or Sovereign Gold Bond (SGB) rather than physical Gold.
e) International Funds: They purchase US stocks like Apple, amazon, fb, google etc.
3) Terminology
NAV (Net Asset value) & Unit: U can take NAV as price of ur mutual fund & Unit as number of mutual fund. As per daily closing of stock prices, daily NAV will get change.
Options of investment & Redemption
a) Lumsum: Means one time investment. Do Lumsum only when market is significantly low from last high.
b) Systematic Investment Plan (SIP): is best because u don’t have to time market (Nobody can do it too), cost averaging, Financial Planning purpose (You know this much amount is going to debit every month like ur EMI).
c) Redeem: Withdraw the money back to ur bank account.
d) Switch: Transfer ur amount from 1 scheme to another scheme 1 time. It’s useful in 3 scenarios. 1) When u want to time market (Not for newbies) – Switch from equity fund to debt fund when market seems overvalued & vice versa. 2) When ur scheme is not performing well & u want to transfer the amount to another scheme. 3) When u want to change from Regular plan to Direct plan of same scheme.
e) SWP / STP (Systemic Withdrawal Plan / Systemic Transfer Plan): Transfer ur amount from 1 scheme to another scheme at every specified duration like weekly, monthly etc. I guess, It’s most unused feature but very useful. It’s useful in 3 scenarios. 1) When u want to invest large amount like retirement corpus, Bonus, property sale amount etc. 1st put that amount in debt fund & then do SWP to equity fund over next 3-5 years. 2) When u already invested for 10-15 years & achieved ur Goal or u know that big expense is coming in next 2-3 years (Education, marriage of child etc.), it’s always better to do SWP from equity to debt fund bcoz u never know market condition when u need money. 3) When u want to time market unlike switch, here u can divide it 6-12 installment. 4) When u want to change from regular plan to direct plan, last 12 month’s SIP will attract 1% penalty if u do Switch. U can do SWP for last 12 month’s Unit to avoid penalty.
4) Which date to choose?
Much Research is done on this. In long run date of SIP doesn’t matter in overall return. So, u can plan according to ur salary credit date & other EMI date.
However If ur investing in more than 1 fund, it’s better to spread them rather than on single day. Like if u r doing monthly 3 SIP then better to choose 1, 11, 21 (or 5, 15, 25) kind of dates for better averaging rather than keeping all of them on single date.
5) Number of Funds I should choose to Invest?
More number of funds doesn’t always mean more diversification. Maximum 5-10 schemes (For new comers 3-5 is more than enough) one should invest according to risk appetite. Also never invest all ur money in single Fund house. So, if u r planning for 3 SIP not only each of 3 should have different category (according to own risk appetite)something like 1 large cap, 1 mid cap, 1 hybrid but also all of them should be from different Fund house (Something like 1 from SBI, 1 from HDFC, 1 from Axis).
Reason is same AMC have same investing pattern even though fund manager is different.
Do check Fundoo website (http://www.thefundoo.com/Tools/PortfolioO...ap) for overlapping of stocks between 2 scheme. If it’s more than 30-40% then it’s not diversification but mostly repetition.
6) Which is best fund or scheme?
I always see in my surrounding people ask this common question – Yaar best mutual fund scheme bata de. IT’s FOOLISH Question. Because my Risk taking Capacity might be totally different than urs. So, Best scheme can’t be just taken on borrowed conviction. 1st decide Time frame, Other investments in all asset class (like FD, Gold, LIC, ULIP etc.) & make balance of equity + debt according to ur age & ur risk taking capacity (How much downside in ur portfolio won’t affect ur bed time sleep – invest only that much in high risk).
7) How much I should Invest in MF?
Start investing early is the key. If u r newcomer, start with small amount if u r not confident. Small amount can be as low as 500 per month. But don’t expect miracles from that amount. U need to gradually upscale SIP amount once u get enough conviction or ur payscale increases. Remember, if u thinks that let me do all routine expenses from salary & then do investment from remaining amount, u will never be able to do investment. So, do vice versa. 1st investment & then from remaining amount try to pay all expenses. There is no upper limit in investing here. Because it’s almost 100% liquid (except few major incident like Franklin MF done for Debt fund) even if ur corpus amount is 1 cr. Or 100 Cr., u will get it in 2 days (Compare it with real estate as asset class, which is highly illiquid). I have seen people doing even monthly 1-5 lac SIP & they are making huge wealth over a period of time.
8) Type of Schemes
Single scheme has 4 different NAV.
Suppose SBI bluechip is scheme name. It will have 4 different NAV 1) Direct Growth 2) Direct Dividend 3) Regular Growth 4) Regualr Dividend.
Direct: Means no intermediately or agent is there. U are directly purchasing from AMC site or other platforms that allow direct plans.
Regular: Means u r purchasing through agent. Agent can be individual or even ur bank (e.g. When u purchase through Icici bank, they will offer u regular plan). Agent is helpful to identify ur risk appetite, Goal, other investments & suggest u best plan according to ur need. So, regular plan has less NAV than Direct plan. For equity fund u r giving appx. 1% to ur agent for these services. If u are too busy or not aware about anything than choosing regular plan from “GOOD AGENT” is always better than direct plan with some worst scheme. However in majority of cases finding “GOOD AGENT” is difficult & chances are there, that despite u preferred to choose him at ur cost, he will choose only those plans which offers him highest commission. So, better to be self-dependent & take direct plan.
Dividend: Mutual fund will give u dividend from time to time. Don’t take it unless u really need money like in retirement.
Growth: U will not get any dividend & ur money keeps on investing in it.
One should choose Direct Growth plan.
9) When to exit
No one is talking about this important aspect. We have SIP for systemic investment & it is very famous. But people are using Switch & SWP. Either ur Goal has been reached or U r near to reaching ur goal, start exiting from Switch & SWP. If ur stalwart in market & can time market, when valuation is absurd one can exit from MF & can take reentry at better point. (P.s.: I am not stalwart yet but I have started exiting/Switching from market in current rally. Only time will tell, whether it’s good decision or bad)
10) Where to buy
For investing – AMC site/Office, MFU, CAMS, Karvy, Kuvera, paytm money, et money, grow etc. website
For learning – valueresearchonline, Morning star, Money control, Rank MF, Fundoo etc.
Youtube is there. There u will find best & worst useless videos both.
11) My Rules
• Never invest lump sum amount in equity mutual fund, if u want to invest lump sum – add when there is substantial fall in market & not vice versa. We dimers buy truck load clothes in 50-70% sale & not when there is no discount. Same apply here.
• Do SIP of only that much amount, which u can continue for minimum next 5 years.
• Never take loan to invest in any asset. If u have any loan pending, pre-pay that first rather than investing lumsum in Mutual Fund.
• Don’t check return of scheme daily. Check your fund performance quarterly or biannually. When we are not asking about our money in FD/LIC etc. for next so many years then why to check mutual fund daily?
• Always go with well-known fund house’ scheme (I might be biased here, but let it be) like HDFC, SBI, Axis, ICICI, Aditya birla, Kotak etc. Reason is although mutual fund is good regulated, it is well-known practice that fund managers take under table money (Bribe) to invest our hard money in bad stock to allow exit to someone.
• Check long term return like 5-10 years or longer. Never invest just based on return of 1 year.
• Check AUM. For large cap fund higher the AUM, better it is. For mid & small cap too much high AUM is problematic (Like Hdfc Mid cap opportunity fund). But never invest in company with only few crores of AUM.
• Check expense ratio. Don’t go with too much high expense ratio scheme.
• Diversify ur schemes across different fund house, scheme category based on above criteria & ur risk capacity.
• NEVER EVER INVEST IN NFO or some close ending schemes.
• Index Funds are hidden Gem. It makes whole MF so simple. Just do SIP to Nifty, Sensex, Nifty next 50 etc. index funds for next 5-10-15 years, u will get bumper return even without knowing anything of mutual fund.
Note: We can have query, healthy discussion on Mutual Funds here. So that it will be beneficial to all dimers. If u have any query regarding MF, do ask here. I will try to answer it in my free time.
Disclosure: I am Doctor by profession but have interest & knowledge in Finance. All above post is for education purpose & not any recommendation as I am not SEBI register advisor.
