Equity investing is one of the best ways to create wealth. As an asset class, equity has delivered higher long-term returns than traditional options such as bank deposits, gold, and lately, real estate too. Market meters such as Sensex have recently scaled all-time highs, and this has been drawing new investors to the stock markets.
There are various ways to start equity investing. If you are not an expert of fundamentals and market research, it would be prudent to buy a mutual fund and rely on the stock-picking expertise of a mutual fund manager. A mutual fund allows you to buy a portfolio of stocks picked as per that fund’s theme. The fund manager takes the call on which funds to buy, hold, or sell.
You can invest in equity mutual funds in a systematic manner by buying your preferred fund every month. What’s more, you could start with an amount as small as Rs 100 per investment. While most funds prefer you invest at least Rs. 500 per installment, some funds will even permit Rs 100.
Here’s how you can get started:
Set A Goal
This is extremely important. An investment goal can be defined in terms of a financial target you want to achieve assuming a rate of return during a fixed period. For example, you wish to create a fund of Rs. 2 crore in 30 years for your retirement. Therefore, if you invest Rs. 6000 a month for 30 years assuming a rate of return of 12% per annum, you can create a fund of Rs. 2.11 crore. Goal-setting gives a better chance of succeeding with your investment. It also helps you pick the right investment instrument for your need.
For example, if you had to hit the same goal of Rs. 2 crore using a bank recurring deposit offering post-tax returns of 5%, it would take you Rs. 25,000 a month for 30 years, or Rs. 6000 a month for 54 years. Therefore, achieving a goal with optimal capital use by picking the right instrument, setting the right time frame and returns expectations becomes important, and goal-setting helps you understand these things better.
Speaking specifically of equity mutual funds, they are suited for the pursuit of long-term goals because a longer investment tenure allows the investor to ride out the periodic ups and downs of the market for better average returns.
Pick The Right Fund
There are several equity mutual fund categories and you must pick one as per your goal and risk appetite. For example, if your goal was to save income tax, an ELSS fund would be your pick. If you had moderate risk appetite, you could pick large-cap funds which are composed of shares in large, profitable, and stable company. If you had very high risk appetite and wanted more explosive growth, you could consider mid-cap or small-cap funds. If you wanted to invest in an index such as Nifty, you could buy an index fund or an ETF. The choices are many. The kind of fund you pick and its past performance must align with the goal you’re out to achieve. You could pick one or multiple funds as per your goal.
One of the greatest things about mutual fund investing is the ease of investing. You can register directly with a fund house of your choice by going online. You can set up your fund account to deduct the investment contribution from your bank. You could start, pause or cancel SIPs, switch between funds, or even start a withdrawal plan when the time comes. You could have one or multiple SIPs with the same fund. You can start with amounts as small as Rs. 100 with the funds that allow it, or start with Rs. 500 with most other funds.
You need to periodically check if your investment is performing to expectations. In many cases, not doing anything to your investment plan may be your best option. It’s often seen that mutual fund investments left alone for the long-term have provided excellent returns. However, it still is important to keep checking on the investment from time to time. For example, if your returns expectation is 12% per annum and the fund is only providing 8%, you will miss your goal by a wide margin. Therefore, checking if the fund is on track, and taking the appropriate steps if it isn’t, are necessary for the success of the investment.
You have the option of topping up your investment, i.e., periodically increasing your contributions to the fund in order to accelerate towards your goal. For example, you may start with an SIP of Rs. 100 while your income is low. However, each year your income is expected to increase, and with those increases you must also increase your investment. This will help you reach your goal sooner or achieve bigger goals in order to beat inflation. For example, an SIP of Rs. 500 in a fund returning 12% per annum for 30 years will give you Rs. 17.64 lakh. But if you stepped up this investment annually by a margin of 15%, you will create a fund of Rs. 83.63 lakh.
Equity mutual fund investing is one of the best ways to achieve difficult and long-term money goals such as retirement. When in doubt, so consult an investment advisor to get started.
(The writer is CEO, BankBazaar.com. Views expressed are personal)
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