The biggest mutual fund industry secrets are in their charging mechanism.
- You pay even if you lose money. Their TER (total expense ratio) is usually in the range of 2 to 2.5% (Depending on fund size etc.) Sebi looking to lower expense charges for mutual funds. How does it kill your returns? Mathematically we know that the amount of time required to double your money is (growing on compounding basis) is loosely obtained by dividing 72 by rate of return of investment.Rule Of 72 Definition | Investopedia . For example it would take 7.2 years (roughly) to double your money at 10% interest rate compounded annually. In other sense @ 2.5% expense ratio, you will lose 100% of your corpus in about 30 years! That’s why Einstein called compound interest eighth wonder of universe. This means if somehow you manage your funds yourself and earn similar return to mutual funds (In long-term returns of good shares are similar to mutual funds as they also invest in blue chip shares usually) you can have corpus twice what you would have by investing through mutual fund. Every body is here to make themselves rich and mutual funds are no saints either.
- Do’s and Don’ts you must know
- Do not sell often as selling also attracts a lot of charges from brokerages, in the range of 2–3%. Same rule applies to brokerages also. They love you to sell your holdings. This is a prime reason for operator based or news driven selling. Business channels and brokers thrive on your panic selling!
- Best strategy still is to buy right and hold tight. Either keep your shares in remat form or frozen. I have kept many of my shares frozen and now I thank my wisdom since they are more than 50% up from where I would have sold them!
- My method is to plan my expenses. Suppose I need to purchase a car in 2020, I shall invest an amount with an estimated rate of return. Then I will freeze my shares till 2020. I call this method reverse EMI. Instead of loaning at 13% and paying EMI of equivalent amount, I prefer to gain at 15% with same EMI amount! On simple interest only it is 28% return compared to my friend who took EMI of same amount. In just three years I stand at double the funds than we both started with!
- In long-term markets are risk averse : Number one reason people cite for not investing is RISK.
- Is it really risky to invest in share market?
- Isn’t Bank deposits safer?
Let us understand what share market really is and how it operates. Share market is barometer of economy. In short-term the share prices are driven by sentiment and news. Hence the term risk has been associated with share market. But in the long-term markets are same as our economy.
- If economy prospers, your bank deposits are safe and so are the stock prices.
- If economy bursts, everything is gone including real estate, gold as well as your ‘safe’ deposits! Your money in the bank accounts is as safe as health of economy.
- Okay your deposit is guaranteed and safe in bank account. Isn’t it? NO! Central bank in India (RBI) promises only 1L of money back per account in case of bank default! What happens to my money if a bank goes bankrupt in India?.
- In long-term average CAGR for equities is 17% while for real estates it is 14%. Given any 20 year investment horizon, equity beats everything else combined hands down.
Points to remember
- Invest in big companies to begin with. Start with mutual funds but switch to self investing later.
- Learn to neglect short term corrections based on sentiments. See chart of any big company and you will find that share prices return to the average over long term.
- Over 20 year investment horizon, all big companies are just 1% lower than their all time high. Thus timing the market doesn’t matter in long term.
How to invest in Mutual funds?
A quick summary
- Start with ELSS funds. They have lock in for three years but low TER and tax benefits.
- I like tax funds since you can’t sell them for three years and they have better chance of good returns.
- SIP is much more preferable than timing the market. Start with low EMI. You can always add more funds in case there is a breakdown in markets.
- Remember every year there are two three minor crash. Every three years a moderate crash and every 7–8 years a major crash in the market. Share Market had only one way to go, up.
- In India only 2–3% people are invested in markets. In future a huge amount of money will flow to the market. In next 20 years you can easily see 10X returns. Nifty 100,000.We are entering the golden era of Indian share market.
- Patience is the best investor.