Thumb Rules in Investing Equity stocks and Mutual funds

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As you are aware, stock markets are always volatile, but if you see in the long run it gives superior returns.

In order to get best out of these, following are some of the simple Thumb rules to keep in mind before you proceed to invest either directly into Shares(stocks) or through equity-related mutual funds.

#1. Invest for Long term.

An investor should look at stock-related investments as very volatile and can give best returns only if you hold for a longer period.  It is merely impossible to time the market, so always keep invested for long term horizon of minimum 3years time frame.

If your money requirement is in the near term, never consider this an investment vehicle.

For the time frame of fewer than 3 years choose any Debt fund/Liquid fund to get higher returns than your bank’s savings account/FDs, without any lock-in period and any exit load.

Also, the longer you stay in markets, the higher the returns you get.

If you invest Rs.5000 per month in SIP of any mutual fund for 20 years, which is growing at a rate of 15%. Your total investment will be 12 Lacs and your Total maturity value is around 67Lacs.

If you invest same  Rs.5000 per month in SIP of any mutual fund for 10 years, which is growing at the same rate of 15%. Your total investment will be 6 Lacs and your Total maturity value will be just 13lacs as compared to 67lacs in above example of 20years.

Time is Money. Think wise, think Early, Think Ahead!. Start Early to take full advantage of the Market.

#2. Never invest all your money in one Go.

Many investors listen to their office colleague or neighbor stories of earning high returns in short period or gets attracted to a broker who markets an equity fund with lump sum option, only to get their commission upfront.

Investing in one go is never a good idea, it is fine if we miss such opportunity ,  but catching a market high is very dangerous, it reduces your possibility of winning, because investors get excited about making investment mostly in the wrong time and it is very easy to invest when markets are continuously rising and are mostly gets disappointed when market trembles and the converse is as true it looks very difficult to invest when market is crumbling, things looks horrifying and scary . that may be a mostly good time to invest and trust me it is impossible to time the markets and see the low point.

Hence being regular with your investments is the key to success, never panic volatile markets.

Always spread your available money, below are some of the simple ways

  • If you are investing  your monthly salary, invest every month
  • If you are investing a one time bonus of the year, invest it in the next 6 to 7 months gradually.
  • If you are investing all your savings/ancestors money, invest gradually over a period of 3 to 4-year time frame.

You may read Why you should never go for Traditional Endowment Life Insurance plans? Term insurance is the Best option!

#3. SIP (Systematic Investment Plan) – The best way to invest in equity funds

SIP: as the name tells all about, you invest a fixed sum regularly on a pre-decided date to an equity fund regardless of the market conditions.  In the long run, you benefit not just from compounding but also rupee- cost averaging. You end up buying more units when markets are down and fewer when markets are up.

Thus, the average cost of units is eventually lower than what It would have if you wait and tries to time the market, which is not practically possible.

Another advantage of SIPs is that it makes investing become a habit. Mostly SIPs are automated investments that ensure you save the designated amount every month. This way you can invest before you spend.

Think SIP as a recurring deposit in mutual funds, No need to think hard about it, It just fits with our income cycles, we get our salaries every month, we pay our utility bills every month, we pay our EMIs every month, likewise we must consider investing also every month. You will be able to average your investments, you will eliminate the possibility of catching a market high.

#4. Invest only in Direct Mutual fund Plans

Just to know the background of Mutual funds, Each fund will charge you money for managing your money. The charges vary from Fund to Fund, these will be within the guild lines of SEBI.

There are two ways of investing in the same fund, one is Directly purchasing from Fund company, second Investing through any intermediaries, brokers, agents,  distributors or Demat Brokers.

The advantage of Direct Plan is it has low Expense Ratio compared to Regular plan offered by agents.  Reason being, you are buying the units directly from the fund house. The fund house passes the portion of Direct Plan trail commission savings to the investor.

Generally the difference between Direct fund Expense ratio Vs, Regular Fund Expense ratio will be around 1.5%. This means your broker is charging equally, some cases more than fund company cost on direct Fund.

Remember, this amount is not as small as you think. for monthly SIP of 5000/- for 25 years, Benefit for going with Direct plan vs Regular plan is around Rs. 28Lacs which is lot of Money!

This amount is charged from your fund in the background by Mutual fund company, many brokers will fake it as No charges by going through them., which is just a trap. You will straightaway lose above money.

 

Why most of the people not using the direct plan?

Because they are not aware that you can use “internet” to buy the mutual fund and do not need a distributor for that.

A few years ago, it was not possible to buy a mutual fund directly, but now it is possible.

Why there is a difference in returns?

This is because of the higher expense ratio in the regular plan where a portion of the return is given to the distributor.

If you are reading this article, I can safely assume that you know how to use the internet. Hence, please use it and invest in the direct plan to get more returns on your hard earned money.

There are various ways of investing in Direct funds, But the best way to invest  Direct Mutual Funds is through MF utilities website, ECAN. You can Do it Yourself online, Completely electronic!. This is just an interface between the fund company and you. You can invest across most of the mutual fund companies.

I am currently using from this website. I am not benefitting either directly or Indirectly by promoting Direct funds Vs. Regular funds.

In case if you have already invested in Regular plans through a broker, you may switch to Direct plans by redeeming and Investing the same amount again in direct plans, keep your exit load and tax liability in mind before switching.

 

You may like to read – How to earn High Returns from your cash/ Bank Balance- Liquid Mutual fund is the Answer!

Remember below phrases, Keep in Mind always. 

  • The emergency cash should be at least 4 to 5 months of expenses.

  • Always keep insurance and investment separate, Never buy them as combo.

  • Equity Mutual funds provide much better returns than the PPF in the long term.

  • Always keep your Equity investments in SIPs, that’s as simple as Recurring deposits in earlier days.

  • Among equity mutual funds, multi-cap funds are the best as they invest in companies of all sizes.

  • Start withdrawing money from equity mutual funds to Debt, /Liquid funds at least 18 months before your  goal date, through Systematic Transfer method every month,

 

Friends, if you have any clarification, please write to me in the comments below.

If you like this article, please share it with your family and friends.


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  1. Very informative article, please check out my blog too

    1. Thanks Sukumaran. Nice to see your blog. Keep up the good work!

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