Sunday, September 21, 2014

A New Investors Guide to Mutual Fund Investments…

All of us work really hard and it would be unfair if our money/investments aren’t working as hard as we do. To force our money to work hard, it is inevitable that we consider the stock market. And, if you are novice investor, taking the mutual fund route is the best. So, if you are someone who is new to the stock market as well as Mutual Funds, this article will help you make up make up your mind and decide…

As always, if you feel some more of your Questions are still left unanswered, feel free to sound off in the comments section…

Before We Begin: Why this Article..

A couple of days back, a friend of mine who I have known for almost a decade pinged me. He was hearing a lot about our stock market being in a “Bull Run” Phase and wanted to take advantage of this momentum. He was very new to the stock markets and felt that going the Mutual Fund Route would be the best for him. During the discussion he suggested that, some of the questions he had would be useful to other blog readers who may be sailing in the same boat as he was. So, here we go… 

As a new attempt – this article is structured in a Q & A or Conversational Format between me and my friend.

Rajesh: Hi Anand, Need some advice about stock market investments. I am thinking about Mutual Funds da.
Anand: Hi Rajesh, sure da. Yes, Mutual Funds are the best choice for people like us who are busy with a regular day job and cannot track our investments on a daily basis.
Rajesh: Yes da. What route would you suggest? Do I need a lot of money to start investing in Mutual Funds?
Anand: No da, not required. You can start off with a very small amount.
Rajesh: Is it? What is the Minimum amount da?
Anand: It depends on the mutual fund da. Most funds would accept investments as small as Rs. 500 or Rs. 1000 (This varies from fund to fund) if you commit to Systematic Investment Plans (SIPs). I had written an earlier article about SIPs in April 2012. Click Here…
Rajesh: Oh, must I commit to an SIP?
Anand: Yes da. No matter what the market phase is (Bull or Bear), SIPs are the best choice for people like us because you can start with small amounts, it brings discipline to investments plus it helps us average out our gains/losses by investing every month.
Rajesh: Ok da. I have been going through many stock market websites. Am confused da. What website will give me clear cut ideas?
Anand: What is the bank with which you have a DEMAT Account?
Rajesh: I have XXXXX Bank DEMAT Account da.
Anand: Check their website itself da. Their DEMAT Account is one of the best in the Indian markets.
Rajesh: But, wont they recommend only their mutual funds?
Anand: No da. They CANNOT/WILL NOT. No Demat Account provider can recommend his/her funds only. It is against the laws set forth by SEBI. As a Demat Provider, they are expected to be neutral and put the customers interest in the forefront. So, they will recommend mutual funds from all fund houses (not just theirs)
Rajesh: Oh ok. What fund would you recommend for me?
Anand: It depends on the amount of risk you are willing to take da. How much money are you willing to lose?
Rajesh: What are you asking da? Am investing to make money da not lose.
Anand: No Rajesh. All stock market investments come with an inherent risk. There is always a probability that your investments will go-down in value. For ex: Now the stock market is at never before highs (27000 for Sensex and 8000 for Nifty). If for some reason the market tanks and goes down by 30% there is a chance that your investment will go down by an equivalent % or more as well… That is why I asked you, how much money you are willing to lose/risk.
Rajesh: Ok da. I want to invest in the stock market but don’t want to lose a lot of my money da.
Anand: Fund Classification – By Risk (High to Low)
Thematic/Sector Oriented Funds
Small/Mid-cap Funds
Diversified Equity Funds
 Blue Chip Funds
 Balanced Funds
 Debt Funds
Rajesh: So, what would you recommend for me da?
Anand: The first 3 are extremely risky da. So, I wouldn’t recommend them for you. First tell me how much are you willing to invest each month.
Rajesh: Am thinking around 3000-4000 rupees per month da
Anand: Ok. Whatever is the amount you decide, split it into two and start off SIPs in two different Mutual Funds. Choose one Balanced Fund and one Blue Chip Fund.
Rajesh: Doesn’t a Balanced Fund Invest in the stock market?
Anand: Yes da, they do. But, they invest only around 50% in stock market instruments. The remaining goes into safe investments which means, around 50% of your investment is safe.
Rajesh: What is a Blue Chip fund da?
Anand: Blue Chip is nothing but a fancy term for Large Cap companies. Blue Chips are extremely large and successful companies that have a long history of profits. State Bank of India, Reliance Industries, ONGC, NTPC, ICICI Bank, HDFC Bank etc are some classic examples. There around 100 or so super large companies in our country and these mutual funds predominantly invest on such companies only. Even the ELSS sub category of mutual funds invest only in blue chips
Rajesh: What is the advantage of investing in blue chips?
Anand: Though the price of blue-chip shares may not go out of the roof like a small cap or mid cap company, nor will their price go down as fast as their smaller counterparts. Because of their size and profitability, investors will not panic much and their stock prices will remain stable even during tough times. This does not mean you wont make any losses, but the relative % or probability is lower in comparison to other sized companies.
Rajesh: Ok Da. Tell me two funds – one in blue chip and one in balanced category that I can invest in.
Anand: Sure da… And I gave him a couple of choices… If you are looking for the best mutual funds to invest now, you can check out my book on Indian Income Tax & Retiring as a Crorepati.
Rajesh: Thanks da. Take care.
Anand: Thanks da. You too, take care.

Some Last Words:

You may be wondering, my investment profile is not the same as your friend Rajesh. Yes, you are right. This next paragraph is for you…

Investment Strategy in SIP’s for different Risk Profiles:

Step 1: Decide the amount you wish to Invest. Lets say Rs. 10,000 per month
Step 2: Decide your Risk Profile – Super Aggressive, Aggressive, Moderate, Conservative
Step 3: Select funds according to your profile.
If Super Aggressive – Split your money into 4 and start SIPsas follows:
  1. Two Diversified Equity Fund
  2. One Small Cap or Mid Cap Fund
  3. One Blue Chip Fund
If Aggressive – Split your money into 4 and start SIPs as follows:
  1. One Diversified Equity Fund
  2. One Small Cap or Mid Cap Fund
  3. Two Blue Chip Funds
If Moderate – Split your money into 3 and start SIPs as follows:
  1.  One Diversified Equity Fund
  2.  One Blue Chip Fund
  3.  One Balanced Fund
If Conservative – Split your money into 2 and start SIPs as follows:
  1.  One Blue Chip Fund
  2.  One Balanced Fund
In my book on Indian Income Tax, I have recommended the best mutual funds that you can consider for Investment now. You can choose funds from that list and start off your SIP Portfolio!!!

Happy Investing!!!


  1. Balanced fund doesn't always means 50//50% split right? Why diversified equity fund is considered more risky than blue chip?

    1. Yes Madhu it is not always 50-50 that is why I said Around 50% :) The fund manager takes the call on whether to have slightly higher allocation to equities or debt depnding on the market situation

      A Diversified Equity fund invests in stocks across all categories - small/mid/large but a blue chip only invests in large stocks. So, they are slighly higher risk because small & mid cap stocks tend to go down much higher than large caps/blue chips in case of a market downturn.

  2. Hi
    I want to know under which risk category does ELSS comes?

  3. hii anand, hope ur doing good..
    i have one question , i m in merchant navy can i invest in mutual funds? is it taxable? if yes how it is calulated i m planning to invest 10000/year?


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