Mutual fund investments are subject to market risks, please read this 101 article by Manil S Dodani carefully before investing
For every college going student (like you maybe), their monthly pocket money is like life blood. You can use it to head out to parties, eat at new places, watch Friday releases and sport some swanky new clothes and shoes (bags, for the fairer sex) and more. At the end of the month one out of the following 4 possibilities will present themselves:
1. You’re left with a small amount of money from your pocket money.
2. You’re left with nothing
3. You have a huge surplus because you borrowed from a friend with a promise to repay the following month
4. You have quite some money left because you saved the previous month and that’s all still there in the piggy bank/wallet/hole in your wall.
Out of the above possibilities a rational minded individual or a conscious spender would tell you that possibility (1) is ideal and (4), desirable. It’s simple why it’s so. When you’re left with some money it simply means you SAVED. It’s a healthy habit and it means you’re on your way to being a successful money manager. Possibilities (2) and (3) don’t mean you can’t manage your money, it simply indicates that you need to cut a few corners and plan for future expenses – like next week’s club night so you can tide over to the next month comfortably. The next 1000 words are aimed at telling you one of the many ways you can put your savings to work for you and in the process develop a savings habit and some cool moolah.
Enter: Mutual Fund
Ever thought about what a mutual fund is or how they work? Think you have Rs.500 and you head out to a restaurant for dinner. Currently you can try one or two dishes on the menu, there’s no guarantee that you’d like them and you can’t possibly order more dishes or be able to finish them once they arrive. But what if, you go the same restaurant with 5 of your friends? Now, you can order 5 times the dishes at roughly the same price per person. To add to this, your steward is an expert at what dishes are the favorites at the restaurant considering he works/eats there every day and will help you order only those. Even if you end up not liking a few dishes that were ordered, chances are you’d like the others owing to the options at hand! Therefore eating in a group at the restaurant (assuming your friends have almost the same appetite as you) is more beneficial than eating alone. This is the founding principle behind a Mutual Fund. A Mutual Fund pools small investors and invests the collected money into shares, government bonds or other financial instruments in order to gain returns for investors. Mutual Funds are run by money managers who invest the pooled money on behalf of the investors, they are qualified professional experts, and are regulated by SEBI. You don’t need to have mutual friends to invest in mutual fund, all you need is a small sum of money, a little risk taking potential and you’re set!
Take a SIP | Start small, finish big
You might not be too keen to put down a large sum of money to invest in the mutual funds market. There’s nothing to be afraid about, not everyone is or not everyone can. A smarter, safer and more disciplined method of investing into mutual funds is via a SIP. A SIP or Systematic Investment Plan is a way to invest a fixed amount of money in mutual funds, periodically, monthly, quarterly or semi-annually. This allows you to invest in the mutual funds market with a small sum of money giving you the power of averaging your investment cost and benefit from compounding. Investing Rs.1000 monthly in a SIP at a 9% growth rate over 10 years will yield 6.69 lakhs and grow progressively as time passes. SIP’s offer growth over a long term – you’d be able to reap the benefits of these by the time you actually need to, maybe to study abroad or buy a really expensive car.
Equity based SIP Plans
1. Reliance Equity Opportunities(Rs.100/monthly)
2. HDFC Top 200 (Rs.500/monthly)
3. Axis Long Term Equity Fund (Rs.500/monthly)
4. Canara Robeco Equity Diversified Fund (Rs.1000/monthly)
(Note: The author and Youth Incorporated do not endorse any of the funds mentioned in this article and claim no liability arising out of investments made in Mutual Funds. Investors are advised to exercise discretion before investing. Caveat Emptor)
WHY MUTUAL FUNDS?
The prices in an equity market are theoretically affected by demand and supply forces. However numerous external factors such as the Eurozone crisis, to a drought, a terror attack, a natural disaster or unpromising news about a particular industry all cause fluctuations in equity prices. Keeping track of all these factors would require herculean effort and copious amounts of time. Further, quantifying the impact of these real world developments isn’t easy. This is why we need an expert to manage the Mutual Fund. A mutual fund manager makes sure that the investment portfolio is exactly like a gujarati thali – it has the right amount of spice and sweet to balance the palate while making sure a large number of options are on the plate available for a sumptuous, satisfying experience.
While we may understand what was on the thali, however choosing the right options to minimize risk and maximize reward requires both – intelligence and expertise. Fund managers hedge a portfolio to cancel and spread out risk across various sectors and instruments.
Steps to invest in a mutual fund
STEP 1– Apply for a PAN card and open a bank account. This is a must. Approach your local bank branch to help you with both these tasks, they will guide you through the procedure. If you are below the age of 18, ask your parents to do this for you, they will act as guardians and invest on your behalf and you can claim these funds once you are an adult.
STEP 2– Choosing a mutual fund – There are many resources including magazines, websites and finance journals that shed light on the portfolio of a scheme, past performance, fund managers and more. These can be analyzed to first shortlist the ones that seem most attractive, ideally with a low risk rating. Then narrow down funds that have a SIP option allowing small investments monthly. Check the list out for a few suggestions.
STEP 3– Choose a broker/ Internet trading platform/ Distributor – You need a broker in order to invest or sell mutual funds. A quick search on Google or on your social friends’ circle can help find one. If you’re comfortable using the internet to trade, head on to www.fundsupermart.co.in and open an online account. You could also approach your local bank branch or well-known distributors such as Bajaj Capital to start transacting.
STEP 4– Investing in a mutual fund is only the beginning. Tracking and following up on your fund’s performance regularly is vital. This step allows you to make a conscious entry/exit decision – however in the case of a SIP you don’t have to deal with this – let it roll. However if a fund becomes riskier or is not performing well constantly, you might have to consider reviewing your decision and selling your investment.
We’re all in the same NAV
Net Asset Value (NAV) describes the fund’s assets and liabilities. The net assets of the fund divided by the number of units will determine the price of 1 unit of the fund (1 share as is commonly interpreted). It is important to note that the fund and brokers will charge some fees in order to allow investments, this will further add to costs of investing in mutual funds. The unit price of a mutual fund is determined every day much like share prices.
Investing in Mutual Funds can be daunting. Here’s an expert view on how you can start investing young: “Invest early, invest regularly and don’t let price fluctuations bother you, if a fund’s value falls, this presents an opportunity to buy units at a lower price and capitalize on the price rise in the future!”, says Hemal Shah,Mumbai based financial broker. “Invest in mutual funds with a horizon of 8 to 10 years to truly realize gains, in fact a mutual fund is a better option than a PPF (Public Provident Fund) as it provides an open entry/exit option and is a more flexible product”, he adds.
Volume 5 Issue 11