Why should you invest in Mutual Funds
Don't buy Mutual Funds from a broker, buy Direct not Regular, don't commit to SIP right away - do iSIP later.
Let me draw a small diagram of your life in numbers
|>===============|-------------------------||
25 expenditure 55 expenditure 85
If you start to work at 25 and would retire at 55, go on to live till 85 - You will need to fund 30 years of retirement with first 30 years of salary!
Your working career of 30 years needs to fund your 30 years of retirement. So, speaking like a lay man you should be saving 50% of your salary and growing it at a minimum of inflation rate. Historical inflation rate in India is anywhere between 4.0% - 11.5% (actual numbers don't matter for the argument I am making). A fixed deposit for a tenure 1 year would earn you at least the average inflation rate. So at a bare minimum you should put your savings in FDs that automatically get renewed and never touch them till you retire.
All your expenses, groceries, emergencies, housing EMI should be funded by your expendable 50% of salary. Cross your fingers and hopefully you will sail through!
Let's take this savings target one notch up now. Why? The more you save, the sooner you can retire. It is not a linear relationship though. If you save 10% more from your salary you wont retire 3 years earlier (10% of 30).
The sooner you want to retire, the higher you will have to save over the 50% mark of your salary and the higher should your returns be over inflation rate. So, what is the next easy way to earn returns above FD interest rate? Yes, markets, and a less risky variant called mutual funds. Debt funds will be a little better and Equity funds will be much better. So it is imperative you have to invest in Mutual Funds - hopefully in Equity or Balanced or Index funds. Come on, don't be a sissy and put all your money in FDs.
How to invest in Mutual Funds?
SEBI is the regulatory body when it comes to Mutual Funds in India. SEBI mandates that everyone who wants to invest in mutual funds should be KYC complaint. You can read on the internet about how to get KYC done yourself. There are a couple of blog posts about it.
Do not apply for mutual funds over 5000 through a broker in all of your life time. Never ever use a broker, ever! They will give you a regular plan and not a direct plan. If you are lazy like me, use them only to get your KYC done for a mf one time deposit of 5000, nothing more. Don't get sucked into SIP right away.
You should always apply to mutual funds directly - either online when possible or through paper. This way you can apply to direct option of each fund scheme. They usually give 1% more than the regular option. Yes, that 1% matters. Use any retirement calculator and you will see that every 1% additional return on investment can sometime cut down you goal of yearly saving up to 40% (magic of compounding!). My most favorite symbol on the keyboard is ^.
Start with Index funds, gain confidence over a year and then venture into other risky (brown color) schemes. Index funds will do better than most FDs most of the times year over year.
Next article - Most online friendly mutual funds in India
You should always apply to mutual funds directly - either online when possible or through paper. This way you can apply to direct option of each fund scheme. They usually give 1% more than the regular option. Yes, that 1% matters. Use any retirement calculator and you will see that every 1% additional return on investment can sometime cut down you goal of yearly saving up to 40% (magic of compounding!). My most favorite symbol on the keyboard is ^.
Start with Index funds, gain confidence over a year and then venture into other risky (brown color) schemes. Index funds will do better than most FDs most of the times year over year.
Next article - Most online friendly mutual funds in India
No comments:
Post a Comment