Investing in mutual funds

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% 3.45 Lakh	9.91% 6.52 Lakh	15.28% 22.45 Lakh	21.7% 93.37 Lakh
Franklin India Bluechip (Equity: large cap)	7.68% 3.46 Lakh	10.12% 6.55 Lakh	13.06 % 20.5 Lakh	20.08 % 80.8 Lakh
Franklin India Prima (Equity: mid cap)	14.42% 3.82 Lakh	15.13% 7.42 Lakh	13.16% 20 Lakh	22.09% 96.64 Lakh
Birla sunlife 95 (Balanced equity oriented)	9.03% 3.53 Lakh	10.56% 6.63 Lakh	13.53% 20.4 Lakh	17.08% 62 Lakh
HDFC taxsaver (Equity: tax planning)	7.7% 3.46 Lakh	10.25% 6.57 Lakh	14.13% 21.1 Lakh	23.27% 1.07 crore

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.

How to open account in fundsindia?

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.