If you do not want to take the risk of dabbling in individual stocks and firmly believe that equity investments is one sure way of beating inflation and building wealth for long-term, Equity Mutual funds which are managed by professional investors is the right choice for you.
What is Equity Mutual fund?
Equity Mutual Funds typically have more than 70% of the fund invested in stocks, most of them hold any where between 30 to 50 stocks. There are several types of Equity Mutual Funds, ranging from large cap to mid cap/small cap and sector based funds. It is managed by professionals who has expertise in assessing the balance sheets and access to market research in related areas. Mutual fund managers also follow various checks and balances including not any individual stocks exceeding say X% of portfolio and buying stocks across sectors, so that performance is well-balanced and risk is minimized.
Which fund should I buy?
While there are hundreds of funds which invest in stocks, fund choice is entirely dependent on the risk profile and time period for which you are looking to invest. Typically you should be looking to invest in Equity Mutual Fund for at least 5 to 7 years, so that you can with stand market gyrations with minimal impact. If you are a first time investor in Mutual Funds, following guide lines(not rules) can be adapted.
- Look at the funds performance for the last 5 to 10 years, this will give us insight into how the fund fared relative to the market during both the bull markets and bear markets. If the fund gives better returns then market, at least 8 out of 10 years and it is falling less than market during turbulent times(2008, 2015), it is considered to be a better fund to invest for long-term
- Another important parameter that needs to be considered is fund management. If there are frequent changes in the fund management, you need to closely watch the performance of the fund, before making a decision to switch.
- Expense Ratio, while most of the funds charge between 2.5 to 3% as the expense, there are funds like Quantum who charge between 1 and 1.5%. How ever this is not the only criteria, you might be better of investing in a fund with say 20% returns and 2.5% expense, then investing in a fund with 10% returns and 1.5% expense.
- Finally look for consistency, fund needs to beat its bench market consistently over long periods of time.
- Choose a balance fund to start with. Balance fund invests around 70% in equities and the rest in bonds. It is good place to start and it is relatively less volatile.
Is one time investment better or should I do a SIP?
SIP – Systematic investment planning is the process of investing a fixed amount during periodic intervals(typically monthly), it allows you to buy more units when market is down and less when market is up. While you can consider one time investment options during major corrections, this has to be timed and it is extremely difficult. It is always a good time to start SIP.
Why should I invest in Mutual funds instead of FD’s and what can i expect in terms of returns?
While Fixed deposits returns around 9 to 10% per Annum, post tax yield is around 7 to 8%. Equity mutual funds typically return around 15 to 18% over long(7 to 10 years) periods of time. If you hold these funds more than a year, all the gains are tax-free. So essentially you get close to 2X returns with Equity Mutual funds, of course with some element of risk, which decreases with the holding period.
If I do SIP over long periods(10 to 20 years), can i get assured return of 15%+?
If you take a couple of blue chip funds, for example Birla Sunlife Front line equity and Franklin India Blue Chip Fund, both with more than 10+ years of performance history, you can clearly observe longer the duration, lesser the chance of your fund typically yielding returns of less than 15%.