Dec 31, 2010 02:16 PM
12817 Views
First of all, the title of the review says 'safer way'; not 'The way' of 'Safest way'.
This is because no equity investment in the world is safe. So, that's the FIRST piece of advice. Invest in mutual funds ONLY IF you have surplus money i.e. money left after taking care of basic needs like food, stay, clothes and loan payments (if any). Do not invest in MFs (or any equity product) thinking about repaying your loan after cashing out of the scheme. The market can and does surprise even the best of us all!
This review primarily focuses on equity MFs; the debt MFs are better avoided by individual investors, in my opinion.
In general, before investing in any scheme, do the following checks:
Past performance: Although past is no guarantee for the future, it is better to stay with a fund house/scheme that has delivered consistent results over last 5 years AT LEAST. You can check the performance on moneycontrol.com
Always, I repeat ALWAYS, opt for a SIP: A systematic investment plan (SIP) invests your money at regular interval of times instead of making a one shot payment. For example, if you have Rs. 10000/- to invest, you can opt for a SIP of Rs.1500/- for 6 months that will automatically buy mutual fund units on the 1st of every month (say) than buying all units at one go. Irrespective of whatever your advisor says, this is the historically proven method of investing that achieves cost averaging and thereby increases the chances of better returns.
Be wary about sector specific funds: The concept of sector specific funds defies the very logic of investing in an MF - diversification. In plain words, if you bet all your money on one sector and of that sector goes for a toss (like the Indian Telecom sector), you lose money. But if you bet on, say 4 different sectors, there is a chance that even if one goes bad, the rest 3 will compensate. If you can't understand all this, just remember to buy schemes that are diversified.
Fee Structure: Get clarity about terms like entry load, exit load, management fees etc (search on any MF website and look for FAQs). In India, entry load is NIL. But exit loads and management fees vary. Remember, even a difference of 0.25% in fees matters sufficiently in thelonger run, all other things being equal (fund house performance)
Stay with big: Always invest in schemes that have large corpus. Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. Another advantage of big mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds units with ease. In India, the big names are SBI, Reliance, ICICI Pru.
Patience: Historically, the returns on equity investment have been far greater than any other asset class ONLY IF the holding period (i.e. ability to stay put even when the markets are down and everyone is running around like, as they say, headless chickens) is long. That's why one should always invest only the surplus money; it should be something that you won't need in the next 10 years at least. It may be as small as Rs. 2000 per month, but be disciplined and patient.
So, that is it. This is by no means a comlete guide. But I hope that it gets you started. Ultimately, it is your money, you better study well to know where it is going!
