Investing beginners wanting to be wealthy, start with Index Mutual Funds

We are taught various subjects in school with the glaring exception of money, finance, investing. We all want to be wealthy but no one teaches us how to be wealthy. For the average person becoming wealthy will take time and effort. For most becoming wealthy seems such an impossible dream that the don’t even plan for. The solution for this is to think big and start small and keep building on it, a step at a time.

Comparing investing options

For someone who is starting out needs to figure out what to invest in and how. Some of the commonly available options are:

  1. Invest in your self – The best option, but not actionable in the context of personal finance and this investing blog.
  2. Fixed Deposits, PF, PPF – A good place to start and save some money. Unfortunately, they won’t make you wealthy if you are starting with a small amount of money.
  3. Insurance Products – for e.g. ULIP’s, investment and insurance packaged in one product. They make the insurance products selling company profitable and not you.
  4. Stocks – Can deliver huge returns, very good for someone who knows about it, dangerous for the ignorant.
  5. Mutual fund – Mutual funds are heavily marketed. SIP is a common word. Mutual funds look easy and seem less dangerous that mutual funds. So, it’s a good starting point.
  6. Real Estate – If you are a starter in investing, real estate should not be the first investment

I would encourage every looking at investing to get wealthy and not just to save to look at mutual funds of stocks as an option also called equity funds. The problem with mutual funds is that we have hundreds of funds selling various mutual funds.

How to select the class of mutual fund

We have several types of mutual funds. To name a few

  1. Debt funds – over simplified meaning, think of a fixed deposit.
  2. Equity funds – think of stocks
  3. Balanced funds – Mixture of equity + debt fund

For those who done understand the meaning should look it up and self-educate themselves. (Think of the self-education as a homework to build your understanding, even it means I am asking you to move out of blog and go somewhere else to understand it.)

Equity outperforms debt (stocks give better returns than a fixed deposit) over the long term. This the fundamental premise we are operating on. Do some homework and dead upon google to find out if equity gives better returns than debt.

How to select an equity fund

We have large cap, mid cap, small cap and sectoral funds available. So, the question is which type of fund to buy. Since the blog is for beginners in investing, hence it needs to be simple. It is best to buy an INDEX FUND.

Please read up on index funds. Another piece of homework. If you want to be wealthy, you will have to do some work. Index funds are sold by various mutual funds. A list of some mutual funds is given below. (click the link for a list of index funds)

Criteria for selecting the mutual fund house

I don’t have any preference for any mutual fund, however my selection criteria would be based on the following elements

  1. Nifty Fund
  2. Dividend Fund – I am suggesting dividend so that new comers get an annual dividend. Personally, I use the growth fund for reasons related to tax and the fact that I don’t have a need for funds at this point of time and hence prefer to go for a growth fund (Homework: Read up on the difference between dividend vs growth option)
  3. The fund house with the least expense percentage. Research it using the links shared

How much to buy

Start with a SIP which is not a significant amount compared to your take home. However, the minimum one can go for in a SIP is Rs 500 per month

  1. Take home income less than 25k – start with a SIP of RS 500 per month
  2. Take home between 25-50k – start 2 SIP per month of Rs 500 each (1K per month).
  3. Take home between 50-75k – start 4 SIP per month of Rs 500 each (2K per month)
  4. Take home salary 75k+ – start with 4 SIP per month of Rs 1,250 each (5K per month)

Summary

  1. Start with an index fund
  2. You can choose from any of the mutual fund houses based on the criteria described
  3. Start with a SIP
  4. Amount for the SIP is a as explained based on your take home income.
  5. Invest the money for a minimum of a year and leave them instead for 2-3 years.

This is the first post and not a book and hence I have made certain claims without proving them. I will need multiple posts to explain why to start with an index fund. As a homework read up the views of Jack Bogle and Warren Buffett on index funds. Additionally, since the post is for starters, I want them to give them steps to start with rather than confusing them with theory.

If you ask someone in mutual funds about starting with index funds, they will tell you that better options are available. They will say that other options are better because irrespective of what returns you get, they will make more returns (will be able to charge you for higher expenses) if you buy other type of mutual fund. I will write about expenses in upcoming posts but don’t want to confuse a beginner by getting into more details.

Now that the type of fund and amount is clear, we need to discuss how to buy, from where to buy. The next post will discuss this.

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