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In my earlier post I had mentioned why you should stay away from various news paper articles and stock tips to make your investments and why it is important to spend sufficient time and effort before making investment decisions.
I have also talked about how to prepare a list of all your assets and estimate your current growth rate and monthly savings and commence on your wealth creation journey.
Hence, the next question arises as to how one should really start their investment. How should they invest in various equities and debt instruments if relying on one-off stock recommendations is not an option. The answer to these questions largely depends on the amount on time and effort you are willing to devote, your existing skills and competencies and your willingness to do own research and learn about financial markets.
Let us look at the various investment options available to an investor (just the simple ones which I like) in decreasing order of complexity.
Direct Equity Investment through Demat account
Portfolio Management Services (PMS Services)
Mutual funds
Direct equity investments
Personally I feel this is the most complex, as in, it requires significant time and effort to pick-up good stocks. You need to be well versed with financial statements, should have good understanding of businesses and willing to do very thorough research. If you want to take this route and do not have any prior knowledge, I suggest you start with reading tons of books on equity investment and also on Indian stock markets. Direct equity investment is a different game altogether and unless you are willing to devote sufficient time to read and understand the company in which you are planning to invest, I would not suggest this approach. However, if you are well versed with markets and feel that you can generate higher returns than mutual funds, they surely direct investments is the way to go.
Portfolio Management Services
Many firms offer portfolio management services wherein they manage your money and invest in equities on your behalf for a fee. They are not as regulated as mutual funds and risks could be higher. Hence the Govt. mandates minimum corpus requirement of INR 50 Lakhs (as of Jan 2020) to invest in a PMS. The fees of PMS is typically higher than Mutual funds and most have a profit sharing fee as well. Again, if you want to take this route, you should be well aware of the various PMS offerings and see if their goals align with your goals. You need to thoroughly evaluate the Fund manager, the PMS team and should look at the past track record as well. Different PMS have different investment strategies which you need to understand and evaluate to see if it matches your comfort level.
Mutual Funds
If you are new to investing, this is probably the best way to start. Mutual funds are heavily regulated, easy to invest in and deliver decent returns in the long run. However, you still need to be aware of the overall mutual fund schemes (there are more than 40 mutual fund houses and 300+ schemes just in equity segment), fund manager, team, various offerings (large cap, mid cap, small cap, hybrid, debt, sectorial, etc.), options (growth/ dividend), fee structure, etc. You should also look at the underlying assets/ stocks at a high level. Even here you cannot rely on simple newspaper recommendations or tips. Just like you spend sufficient time and effort before making any purchase, you need to evaluate your investment options as well no matter what you choose.
To some of you the plethora of options and schemes available and the terms mentioned above may seem overwhelming, but its really not the case. A brief reading about mutual funds should get you started.
For instance,
Plan – Regular/ Direct: All mutual funds provide direct and regular plans. In regular plans, an additional commission is paid to your sales agent/ broker or advisor every year (you don’t pay it but the fund house directly deducts it from your investment value ). In direct plan, no such commissions are paid. If you are buying mutual funds through your Bank Demat account you are most likely buying a regular plan and the bank takes the commission. All underlying investments, management team, etc are exactly the same in both direct/ regular plan. Always strive to go for a direct plan.
Category – Large cap/ small cap in very simple terms means the current market value of the company. Large cap mutual funds invest in fairly large companies where as small cap mutual funds invest in smaller companies. Multicap funds simply invest across all categories. Sectoral funds invest in a particular sector – Say banking or consumer. Frankly, for investors who are just starting out should avoid such focused funds which do not provide adequate diversification
Growth/ Dividend – This is fairly simple – In the dividend option the MF gives you a periodic return from your invested value whereas in growth option your invested value keeps compounding until and unless you redeem your funds (Just like in an FD you can get interest monthly/ annually or you can get the entire interest at the end of term)
Equity/ Debt/ hybrid – Equity funds invest in equities. Debt funds invest in various debt instruments, Corporate bonds, govt Bonds. Debt funds can be used for managing the debt portion of your portfolio. Hybrid invest in both (basically a combination of equity + debt).
There are a few more things as mentioned previously which you should probably look at. A quick reading is all you need to decide on your starting investments. Investing through small monthly SIPs could be a good way to get started quickly.
Below is a snapshot of 10-year returns of some Large Cap funds (Jan 2020).
Source: AMFI Website
As you can see, over a long period of time, the performance of mutual funds can vary quite a lot as well. If you look at the corresponding AUM (Assets Under Management -the overall funds being managed), some of the average funds have garnered massive inflows while some top performing funds are sitting on a fraction of those inflows.
If you really want to create huge wealth in the long term and aspire to maximize your returns, you need to study and dig-in further and devote sufficient time. An additional return of even 2% can make a huge difference in your portfolio over a long period of time (you can read more about it here: impact of 1% and compounding). Hence not doing research and not knowing about your investments is simply not an option.
However, if you need to just get started, invest in 3-4 different funds and you should be able to get decent returns. Interestingly, if you start early enough and invest regularly, even with a decent 10% annual return, you should be able to do well in the long term (Refer my article - No savings is small). And avoid too much hard work 😊
Financial Advisors
What if you are unable to put the required time and effort for building your investments or are simply uncomfortable with finance and not interested in the above topics? In such a scenario, you should look for a personal investment advisor or a financial coach who can work with you and help you plan all our investments. Here again, you need to do research around financial advisors (there are thousands in India), check for their credibility, competency and knowledge and ensure that they would work with you towards your best interests.
Basically, you need to decide what you can do on your own and what you need to outsource and accordingly decide on the best course of action. No matter what you decide to do, in order to create wealth, you need to spend time and effort and research on the best options. Who said creating wealth is easy?
Would love to know your thoughts. You can view all my other posts here.
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