A Beginner Guide to Mutual funds

Mutual funds, so you are have heard it somewhere or someone told you to invest in that. But you have many questions regarding it. But don’t know whom to approach for clarification?

Mutual funds

Before going to know about mutual funds, have look at The art of Financial planning

Come on lets clear basic doubts we have regarding the mutual funds like

  • What are mutual funds?
  • Where to start investing?
  • How to invest ?
  • How will mutual funds make money ?
  • Are they safe to invest my hard earned money ?
  • Are they better than Fixed deposit?
  • Are the better than Gold ?

To put in a simple way, if I want to go from Hyderabad to Vijayawada. Assume I have my own car. Even though I have two choices

  • Go on my own by driving,  (or)
  • Hire any professional driver to drive for me.

In the 1st option that is driving on my own gives me freedom to choose my own path, can drive on speed I like to and many other benefits I get from it.

In the second option, I am not keen on driving , so let my driver take all the decisions for me and make me reach as soon as possible the destination being safe.

So in the second option you have time to use it for yourself. As you are not driving.

So basically that’s the difference between stock market and the mutual funds.

In the stock market you take all the decisions , where to invest, when to invest in particular stock… so on.

In the mutual funds, you are not bothered to research about the stocks , you hire a professional to do this job for you.

In simpler words, there is a mutual fund Manager  who takes decisions for you to invest your money to generate wealth for you.

How mutual funds work?

It will collect money from people like you and me, assume that there’s a pool of 100 people. These 100 people contribute a sum of amount to mutual fund. So mutual fund re-invests money in stocks / debts to generate wealth.

Concept of mutual funds

What is the positive side of mutual fund?

Mutual fund invested money can generate income on that. It can be interest or dividend on the invested amount or it can be gain ( difference between buying price and selling price).

So the gained income will be distributed among the pool of people who contributed to the mutual fund.

But will they distribute complete gains they earned?

No”, they are going to takeout some gains let’s say it’s a x%. And this x% is called the management expenses or expense ratio.

Expense ratio can be typically 1% – 3% of your invested amount.

Types of mutual funds

Earlier there used to be many funds but with no classification. So many investors got confused about the funds.The asset allocation and the overall risk profile of the fund did not follow the investment mandate. So SEBI classified funds into 5 main categories. So what are they ?

  • Equity funds
  • Debt funds
  • Hybrid funds
  • Solution oriented funds
  • Other funds

Equity funds

So basically equity mutual funds, invests in stock market. The fund you choose will be Investing in specific stocks or sectors with a certain %. With time this percentage varies as fund manger is going to trade behalf of yourself. As the money is invested in stock market, the risk ratio is higher side.

So the funds returns may vary with the fluctuations of the stock market. But most of the time fund manager tries to beat market and be alpha to generate more returns.

There are 10 sub categories in equity funds like following

  1. large cap funds,
  2. mid cap funds,
  3. small cap funds,
  4. multi cap funds,
  5. large cap & mid cap funds,
  6. focused funds,
  7. sector/ thematic funds,
  8. dividend yield funds,
  9. value funds, and
  10. contra funds

Debt funds

Debt mutual funds are fixed income instruments, basically given as debt to different sectors behalf of you. The returns are generated as interest in this type of funds. There are 16 sub categories

  1. Overnight funds
  2. Ultra short duration funds
  3. Short duration funds
  4. Low duration funds
  5. Money market funds
  6. Liquid funds
  7. Medium duration funds
  8. Medium to long duration funds
  9. Long duration funds
  10. Dynamic bond funds
  11. Corporate bond funds
  12. Credit risk funds
  13. Banking & PSU funds
  14. Gilt funds
  15. Gilt funds with 10 year constant duration funds
  16. Floater funds

Based on time period the funds are classified as above sub categories.

The risk ratio varies from low to higher between the sub categories. Liquid funds and Gilt funds fall under low risk, where credit risk funds fall under higher risk profile.

Hybrid funds

Hybrid funds are combination of both the equity and debt funds. The ratio can either be variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and the rest in bonds or vice versa. Hybrid funds are suitable for investors looking to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.

Solution Oriented funds

Solution Oriented funds created an easy path for the financial planning of complex long term objectives which may or may not need alteration in the strategy with respect to time.

Types of Solution oriented funds are

  1. Pension /Retirement funds
  2. Children funds ( includes various different goals like education,marriage)

Other funds

whatever mutual funds does not fall under any of the above discussed funds will fall under this type.

The most famous funds other than the above 4 types are following

  1. Index funds
  2. Funds of Funds
  3. International funds
  4. Real Estate funds

And right now the ETF’s are gaining the popularity. ETF stands for Exchange Traded Fund. It belongs to the index funds family and is bought and sold on exchanges

okay, now we understood the types of funds and how they earn money, but the main question is not clear yet.

Where to invest?

If you are a new investor, you will be required to carry out KYC or know your customer/client compliance through a Sebi-registered intermediary— mutual fund houses, distributors or online platforms—via the KRAs (KYC registration agencies). This is a one-time process mandated by Sebi to prevent fraud. It involves verifying your identity as a mutual fund investor.

This all can be done in simpler steps using the most popular apps to invest in Mutual funds, they are

Coin by Zerodha

Groww

Paytm money

These are the best services provide you direct plan for mutual funds with no comission or any extra fees.

I prefer Coin by zerodha as it’s the best broker for trading in share market and having larger consumer base and as well as a good business model

How to Invest?

You can invest into mutual funds in 2 ways. They are:

  • Lumpsum
  • SIP

Lumpsum, is investing at a time with large amount of money.

SIP, is Investing in frequent intervals with amount of money you are willing to.

But there is minimum amount of investment for any mutual fund. It varies from fund to fund. Basically it starts from very minimal amount of 100rs.

I think this article has clarified basic doubts about mutual funds. And now you can do your own research about your risk profile and which funds you want to invest and which AMC to choose.

There is a long way to learn. Stay tuned for more strategies | tips | knowledge | discipline. Do follow Learn Investing

What is Trading

Chart

Let us understand the Real Meaning of Trading.

In ancient times, trading used to take place with the barter system, where one could exchange goods against goods, and in today’s date, goods are exchanged against currency and vice versa.

The General meaning of trading is buying and selling of a product, service or commodity. Be it in any business, it would involve trading; ranging from Wall mart to a Fruit Seller, everyone trades; the difference is only in the way trades are executed.

Sell & buy

When one person/party purchases a good and sells it to other person/party with a profit margin, it is simply known as Trading. This is the basic business characteristic; that is right! But in stock market as well, there exist purchasers and sellers, and thereby, trade is executed in the stock market.

Though the duration of keeping or holding the good (Stock) differs from a day, a week or a month to a year or even more than that.

Trade is the life and the economy of the world. The 2 Fundamental reasons that lead to trading are:

  • Buyer & Seller
  • Demand & Supply

Both reasons are prevalent in stock markets as well. The trading of securities in the stock market is not considered to be a well-versed profession, while in my opinion, trading is a profession that is as holy as any other renowned business/profession in the world.

Trading is generally considered to be a bad word and is misconceived with speculation and speculators

While Investment is accepted as a good word. However, if we see the dictionary meaning of both the terms, the basic essence remains the same, i.e., both mean the process of buying and selling something;

the only difference is in the form of holding period and the applied approach.

“Trading is more of a science and Investing is more of an art.”

Mr. George

Soros is a Trader and Mr. Warren Buffett is an Investor, and both are equally successful and wealthy in their respective careers. During my initial stage of the career, I asked many about the better choice between Trading and Investing. Many preferred Trading; while some told Investing; I understood everyone holds their individual choice.

I eventually decided to be both, as “the religion in the market is to make money, irrespective of being a trader or an investor“.

Grow your money

Thus, I decided to be both Trader and Investor

The Art of Financial planning

Believe me, financial planning is the most easiest thing you can do in life.

Naaahh, you disagree with me.. you feel It is complex.

For you financial planning is all about numbers, calculation and complex products available in the market.

You further get confused by all the noise in the market with someone selling mutual funds with “ Mutual funds sahi hai” , others trying to use coronavirus as a perfect opportunity to run advertisement for health insurance and term insurance.

You must know –

Financial planning is all about YOU?

Financial planning is all about managing your personal life?

You feel I have started giving Gyaan rather than straight away telling you that you should have health insurance, life insurance , invest in stocks and mutual funds. You will feel really great if I could name some good performing mutual funds and also name them.

I can tell you all things I specified above but it won’t have any long lasted impact in your financial as well as personal life. I want to make impact in your life, I want to bring some change in your life.

So to make some impact in your life I hereby present you the real life story of someone who is really close to me.Let us name him here Anant.

Anant, a boy born in a small town in India. He is youngest in his family with three sisters elder to him.

His father is a government employee and sole earner in his family. His mother is a house wife managing a family of ten members without any maid.

His parents did everything to make all their four children settled well in their life. Today all are earning a handsome salary in not only India’s but worlds biggest companies.

Anant did graduation and post graduation and started earning a handsome package.

Anant being aware of the fact that his parents have given their whole life to their children and her mother haven’t even stepped out the boundaries of the small town in order to save money so that her children can travel the world.

Anant decided that he will take her mother to different places not only in India but also in other countries so that she can also live her life.

But Turning point was awaited in Anant’s life.

His mother DIED at age of 60.

Anant got shattered. He was just thinking day in day out that her mother has sacrificed her entire life for him and his sisters. And when it was time to go out and live her life, she is gone.

BUT he learned a hard lesson at age 25.

He started analysing the human life.

He found that most of you run daily to offices to earn more and more money. You get increments , promotions and with that your lifestyle do increase and you start giving a life of comfort and a bit luxury to your family.

He found another important phenomenon happens in your life which you are not aware of.You start finding happiness in buying new gadgets, bikes, cars.

Though this happiness is so short lived that it starts getting diminished in a day or two. And then you get in search of another short lived happiness.

Credit card companies takes advantage of this and makes you to purchase anything, anytime at easy EMI’s.

You also decide to buy home because buying home is must as per society norms. Not You buy Home on easily accessible loan.

By the time you reach 30 you have accumulated so much debt in your life that you are now forced to run for at least next 15–20 years day in day out for money, increments, promotions so that you can pay EMI of your home, though you are the one who spend least time in your HOME.

And then reality hits in at age 50.

You start feeling that ‘ you have spent most of your life running for money/family responsibilities. But what about your dreams, your passion. Fact is you had planned your life so poorly that even at 50 you have no chance to get out of this vicious circle.

AND

if you are lucky enough you are left with only few responsibilities as you hit age 60.

This is the life for majority of you.

Anant thought he doesn’t want to run a rat race which this whole world is running.

He wanted to enjoy his present as well as wanted to secure his future.He realised that money is very important. Whole life revolves around money. But money is not happiness.

Anant decided to plan his personal life.

He thought-

What is the purpose of his life ? what are the things that really matter to him in life? What are his top priorities? What gives him the most happiness?

He jotted down five priorities of his life in 2015 –

Freedom- His job requires him 13–14 hours on daily basis. He wanted to have more free time. With free time he will have more time to do what he wants to do.

Excitement- He wants to explore this world. He want to travel to many countries and enrich himself.

Family- He wants to see his family spend time happily.

Security- In today scenario where job is not safe, he doesn’t want to see that phase in life where he is struggling for money. So a good safety net is important for him to have a good night sleep.

Health

FIVE years down the line in 2020 –

For Security he had created an emergency fund. Today he has 2 years of expenses in it only for occasions when there is actual emergency.

Do you think you will face any emergency in your life? If yes, you can also create one.

For Travelling he has a separate account invested in Debt products. He invests every month and redeems amount whenever he has to travel. In last 5 years he has made trips to Greece and Thailand. He has also travelled thrice within India.

Do you have travelling or some other passion then you can also start planning for it.

For Family- He knows that nobody knows about future. So he has taken TERM INSURANCE for himself so that in case something happens to him his family shall not suffer financially.

Further he has started investing in equity products for his kids so that their graduation cost and marriage cost can be taken care of to some extent ( Although he hasn’t has any kid yet)

Do you think you have family who is completely financially dependant on you or at least you contribute upto 50% of your home expenses. Then you can include Term insurance in your personal life planning.

Do you think you will need money for your kids education/marriage. If yes you must start planning atleast from the 15 years prior to the event. This will help you invest less and earn more because time is more critical factor than return.

For FREEDOM- He want to retire early in 2030 at age 40. His focus is to get away from this corporate life and do something which he likes.

He has started investing in Equity products to create wealth for his post retirement years.

For Health- He focuses on continuous physical activity. Further he has taken health insurance for him and his family.

This insurance has been taken considering increasing cost of health facilities. This insurance will save his pocket in case some health emergency comes in.

Do you also feel early retirement is one of your goals. Then why not start now. Remember time function plays more important than return( We will discuss this towards end of this answer)

Now you must be thinking he is earning a lot that is why he is able to plan.

BUT the scenario is-

He has prioritised his spendings.

He doesn’t spend much on new gadgets.

He doesn’t care about upgrading his car.

He doesn’t like to spend much money on dining out and drinks.

He doesn’t believe in doing impulsive shopping.

He has some debt but working towards zero debt by end of year 2020.

He is staying on rent but has no plan to purchase until and unless he can have it without loan.

He spends on what gives him happiness and good sleep.

ARE YOU AWARE OF YOUR PRIORITIES? ARE YOU AWARE OF WHAT BRINGS HAPPINESS IN YOUR LIFE? ARE YOU AWARE OF YOUR TOP PRIORITIES?

IF NOT

It is the time you shall think. Once you get your priorities, source of happiness then financial planning will be really easy and full of fun. You will feel excited seeing yourself reaching near to goal.

Now to further clarify your doubts that you do not need lot of money to plan all such things and how time plays a critical role.You must see below Chart A and Chart B –

Cost of delay

CHART A – Your target corpus of retirement is 5 crore. And you are thinking that there is a lot of time to retirement you will start bit later.

This chart depicts- If you start investing ten years earlier you just need to pay Rs 3980 for corpus of 5 crore vis-a-vis Rs 14000 if you delay.


Food for thought – Can you take out this money for your retirement now? If yes, then please do it.

CHART B – TIME matters more and RETURN matter less.

Time matters than returns

A above depicts that if you consider 10% as return and time as 20 years you will get Rs 7.6 Lakhs with Rs 1000 SIP

B above depicts that if you INCREASE the return to 20% but keep time as 10 years you get only Rs 3.8 lakhs with Rs 1000 SIP. ( This clearly shows if you start late and even if you get double the return the accumulated amount will be half)

C above depicts that if you double the investment amount at return 10% but delayed by 10 years then you accumulate Rs 4.1 lakhs which is again half of the case 1.

Food For Thought-

Neither more investment nor more return can give you that much accumulated amount which more time can give. So it matters less how much you earn but what matters more how much time you have given your money to grow.

I believe Anant has clarified enough that-

Financial planning is all about YOU ONLY.

Financial planning is all about managing YOUR personal life.

If you are clear about your personal life values and priorities then financial planning is very easy. Further Anant has also given you lesson understanding this in early age is crucial.

I hope, now you understand how to start the process of financial planning 🙂

For your Info- Anant is targeting corpus of Rs 3 Crore by 2030 for his post freedom years.

I hope you have read the blog till end and will also implement suggestions. My only aim is to make finance so easy and fun activity that you start enjoying the process of wealth accumulation.

These words are by a money coach on Quora. You can follow him at Kapil Kukreja to be pro at personal finance.

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