Saturday, 12 April 2008

Mutual Funds And SIPs - Basics

You dont need to have a lot of money to start investing. Thats a pretty erronous belief. The answer I often come across on investment queries is "I dont have money" to invest. This answer often is the start of your investment needs. You dont have money - so you need to make whatever you have work.

Take for example you save Rs 100 every month. That makes it 1200 every year. Lets say, you are putting it in an instrument/bank/deposit that gives 5% annually. At the end of 5 years you are getting something like Rs 6830. Suppose there was an instrument that gave you 15%? You know the amount you will make? Rs 8970! A cool disposable income of Rs 2000!!!

The next question is - who will give that kind of money/return. Mutual Funds, well researched stocks have given that kind of return and more. Do you know that markets in Brazil, India, China have given returns in excess of 40% (conservative) in the last year. And its not a single year episode. These kind of returns have been seen for the past 4-5 years. To ride these growth markets, a plethora of country specific mutual fund schemes have arisen. So investing is a global phenomena! And if you are from these nations, your choice becomes wider! Even certain sectoral funds/aggressive funds have maintained a high rate of return.

So how do you jump unto the bandwagon - so to say... You don't happen have too much idea of stocks, returns, markets, etc and naturally you don't want too many risks. So mutual funds become your natural choice. Mutual Funds diversify your risk (puts your money in many companies, eggs in many baskets, so to say), you can invest small, you get the benefits of professional research (every stock that a mutual fund puts its money in is researched by a team of professional fund managers) and professional fund management services; its mostly liquid, ie, you can put your hands on your money whenever you want it.

The best way to start investing in a mutual fund is through a Systematic Investment Plan (SIP). It means just that! You invest small amounts systematically in a fund/scheme of your choice. Its tailor made for a small investor and follows a concept called rupee cost averaging (or dollar cost averaging!)

Here are some easy steps to start investing.

1. Decide how much you can save in a month...Even if you "don't have money to invest" you must be saving something.

2. Find a financial advisor. She/he will guide you on the schemes.

3. Research on the scheme suggested on the internet. Follow some basic principles - see the pedigree of the fund house, see the pedigree of the scheme like last 3-5 yrs performance, see the other schemes the fund manager is managing, the corpus of the scheme (ie the total amount of money in that scheme)

4. Stick to your small investment amount till you are comfortable investing, ie don't let the advisor sweet talk you into putting in more!

5. See the liquidity of the scheme, ie whether you can withdraw your money whenever you want and if any cost/load involved.

6. Bingo you can start your SIP (systematic investment plan) and be on your way to investment riches!. Remember SIPs in equity mutual funds are your first tentative steps into the stock market (and eventual unimaginable riches :-))

Please dont treat this as a comprehensive investment compendium - its just a small nudge towards making your savings more effective!