Why another article
on mutual funds? I am happy to see many people reading my blog and taking
actions. At least 10 of my friends & colleagues talked to me and asked me
doubts about mutual funds. I am happy to inform you that at least 4 that I know of opened fundsindia
account, two people even started SIPs. They had some common questions that I
believe some of you might be having too and I would like to address them in
this article:
How does mutual fund investment work?
I described in my
previous article about what mutual funds are, how they pool money from various
people and invest, different types of mutual funds etc which you can read here.
To understand how
the process works from investors point of view, suppose you want to invest Rs
10000/- in mutual fund A. You issue a cheque or place an order from fundsindia
& pay via net banking. Suppose unit price of A on that day is Rs 50/- (that’s called NAV) then you will be allotted 500 units.
Now say after 2
years you want to sell those units and get your money back. You again place an
order to sell through fundsindia
or any other channel.
Suppose unit price now has increased to Rs 75, you will get Rs 15000/- back in
your bank account. As simple as that.
In case you opt for SIP (systematic investment plan meaning you want to invest regularly every month), which is the
recommended way, you give an instruction to mutual fund to deduct certain
amount every month from your account automatically and you will get units
allotted similar to one time investment. Generally for SIP, minimum value could
be as low as Rs 500/-. Also similar to selling units all at once, you can opt
for SWP (Systematic withdrawal plan) and
you will sell certain number of units or for certain amount of money gradually.
Do mutual funds really worth it?
I would like to let
the data speak for itself. Suppose somebody starts a monthly SIP of Rs 8333/-
(so total Rs 1 lakh every year). He would get yearly returns like following:
|
Monthly SIP of
Rs 8333/m
for 3 years
Return
Value of 3 lakh
today
|
Monthly SIP of
Rs 8333/m
for 5 years
Return
Value of 5 lakh
today
|
Monthly SIP of Rs 8333/m
for 10 years
Return
Value of 10 lakh
today
|
Monthly SIP of Rs 8333/m
for 15 years
Return
Value of 15 lakh
today
|
HDFC Top 200
(Equity: large
cap)
|
7.5%
|
9.91%
|
15.28%
|
21.7%
|
Franklin India
Bluechip
(Equity: large
cap)
|
7.68%
|
10.12%
|
13.06 %
|
20.08 %
|
Franklin India
Prima
(Equity: mid cap)
|
14.42%
|
15.13%
|
13.16%
|
22.09%
|
Birla sunlife 95
(Balanced
equity oriented)
|
9.03%
|
10.56%
|
13.53%
|
17.08%
|
HDFC taxsaver
(Equity: tax
planning)
|
7.7%
|
10.25%
|
14.13%
|
23.27%
|
Please notice that
the longer the term, the better the returns are. Not just because of compounding
but because of rupee
cost averaging too.
Hence mutual funds
do worth it when you invest in them through SIP because over the long term
(10-15 years) they can give you 12-20% post tax returns versus say bank FDs
which gives post tax returns like 6.3% (for FD with 9% interest for a person in
highest tax bracket).
That's why equity
mutual funds must form large part of the core portion of every investors.
Is SIP necessary? What if I invest once and forget?
Yes, SIP is
necessary because it helps you from ups and downs without forcing you to time
the market. Depending upon market conditions, returns could vary drastically in
short term which could be like 6 years or more as shown in table below.
|
1 time inv of Rs 1L
in March 2009
when market was
low
Return
Value of 1 lakh
today
(after 5 years)
|
1 time inv of Rs 1L
In January 2008 when
market was high
Return
Value of 1 lakh
today
(after 6 years)
|
1 time inv of Rs 1L
for 10 years
Return
Value of 1 lakh
today
|
1 time inv of Rs 1L
for 15 years
Return
Value of 1 lakh
today
|
HDFC Top 200
(Equity: large
cap)
|
22.49%
2.76 Lakh
|
5.2%
1.36 Lakh
|
19.1%
5.74 Lakh
|
22.63%
21.3 Lakh
|
Franklin India
Bluechip
(Equity: large
cap)
|
21.33%
2.63 Lakh
|
3.93%
1.26 Lakh
|
16.8%
4.73 Lakh
|
18.82%
13.3 Lakh
|
Franklin India
Prima
(Equity: mid cap)
|
28.33%
3.48 Lakh
|
1.59%
1.1 Lakh
|
15.89%
4.37 Lakh
|
25.34%
29.6 Lakh
|
Birla sunlife 95
(Balanced
equity oriented)
|
20%
2.49 Lakh
|
5.2%
1.36 Lakh
|
15.88%
4.37 Lakh
|
21.22%
17.93 Lakh
|
HDFC taxsaver
(Equity: tax
planning)
|
23.27%
2.85 Lakh
|
3.48%
1.23 Lakh
|
19.76%
6.07 Lakh
|
27.15%
36.71 Lakh
|
To put above in
perspective, 1st column values show returns on investment made in mid March
2009 when market was at rock bottom, returns today are pretty good for just 5
years.
On the other hand,
invest made about 6 years back in January 2008, when market was at peak,
returns are much worse.
However in longer
terms like 10 years and 15 years returns are okay. Still SIP makes more sense
because it helps us do investments continuously in disciplined manner.
How to select mutual fund?
I would like to
reiterate again what I said in
my previous article. You can take star rating of valueresearchonline.com
into consideration and select 5-star or 4-star rated funds. Please diversify
and choose multiple funds from different
categories like large cap, mid cap, balanced and debt funds. Please take a
look at the
sample strategy in that article. Please feel free to reach out to me if you
have any doubts.
How much effort do I need to put? Can I just setup an
SIP and forget?
No. Sometimes mutual
fund performance degrades over the time for various reasons. Hence you must
revisit you portfolio in say every 6 months and watch out for any degradation
in fund ratings. Here is my thumb rule:
- Select only 5-star (or 4-star if required) mutual funds and start SIP in it.
- If rating drops to 3-star, please stop SIP in that fund and start it in another 5-star fund instead.
- If the rating remains at 3-star for about 6-12 months, please redeem your investment from that fund and invest into another 5-star fund.
Please follow the link
and fill up all the required details. Download the form and sign it. You would
need to submit copy of your PAN card and any address proof. Any regular address
proof like Passport/DL/Aadhaar/Utility Bill/Bank statement etc will do.
Either you can send
them to their head quarter or call their local representative to come and
collect it form you.
Disclaimers and disclosures:
The views shared here are based on my own knowledge and
research. Whatever advise I am offering here is best based on my own knowledge
& abilities. I would like to reiterate that equity investments are risky
and there are no guarantees. However avoiding equity completely is riskier. The
risk associated with them can be managed and that's what I am trying to put it
across in simplest possible terms. More on this here.
I am
not going to get any commissions from any mutual fund etc in case you act on my
advice and I don't take any legal responsibility for any losses that you might
incur (at the same time not asking you to share your gains with me :P).
I am recommending fundsindia because I am using it for last 5 years and I found
it really good and convenient. I am just another user for them and I
would NOT be getting any commissions on any investments that
you are going to make. If you use the link above to register, I might be
getting a Rs 200/- coupon one time in case join them. However that is not my
primary motivation and I have made my family & close friends join fundsindia even before they started any such campaign.