In part 1 of this series I wrote about the evolution of an investor to either a trader or a long term investor, and said that I favor long term investing to short term trading.
Then in the second part I wrote about the implicit assumption that a long term investor makes which is over a very long period of time the market will move upwards, and then also spoke about the nature of a share or stock. That nature I said was that a stock is a representation of the earnings of a company, and looking at it that way helps you stomach the volatility that exists in the market and deal with the daily ups and downs.
In the third part I wrote about regular investing, calibrating those investments and three big ideas that drive that type of investment. First one was my expectation that markets will edge higher over a time period of 3 – 5 years, second one was that markets don’t move in a linear fashion and a lot of the gains that have come in the past have come from small time periods that have surprised a lot of people so you don’t want to get out of markets completely, and finally I said that while timing is not be possible, you can vary how much money you put in the market and take advantage of falls.
I ended that post saying that I’ll deal with what are some of the instruments that you can use to execute this strategy, and that’s what I’m going to write about in this post.
ELSS Tax Saving Mutual Fund
If you want to invest in equities then ELSS funds are a great way to get started. They are one of the best options in the 80C limit since they have the lowest lock in period, and by investing the equity portion of your portfolio in ELSS, you ensure that you get some tax benefit right away which can be pretty significant if you are in the 30% bracket and the advent of some great tax free listed bonds also means that even if you don’t invest in bonds with 80C tax benefits you can still get good yields so you can keep 80C for equities.
Here is a list of good ELSS tax saving mutual funds that I updated late last year and this gives some good options that you can select one or two from.
I think ELSS funds should be on top of your list if you’re looking to get started with investing in shares.
Balanced Mutual Funds
Balanced funds may appear an odd selection when you first think about them because most of them invest about 35% of their assets in debt products, but past performance has shown that balanced funds have given returns comparable to good diversified equity funds, and that stems from the fact that the debt portion of it protects you from the sharp downturns that Indian investors have had to face many times during the last two decades, and there’s hardly any reason why that would stop from happening in the future.
Here is a list of some good balanced funds that you can choose from.
Good Diversified Funds
Hemant has a great article on some of the best diversified funds with some great comments that can be used to select a couple of diversified mutual funds to add to the balanced funds in the list above.
Nifty Index Funds
Internationally, index funds have done a lot better than active funds, I believe this is not true for India, and I’ve highlighted the reasons in this post (also read instructive disagreeing comments from Nitin).
Having said that, I feel if you are going to construct an equity portfolio, at least a small part of that should be a low cost index fund based on a large cap index like the Nifty or Sensex. I say that because costs eat into returns and index funds are lower cost (thought not as low as American funds) when compared with active funds, and have also performed decently in the past and give you the peace of mind that the fund manager won’t be screwing around with your money. The reason to stick to the big indices is that the Indian market is not very deep and volatility becomes quite high when you start moving towards the smaller caps.
These are some options from which you can consider choosing from, and as to the question of how much money you should invest – I think a little less than you are comfortable with is a good way to start.
I say that because it is hard for people to come to terms with how violently and quickly the market can fall, and how difficult it is to not panic and sell when you own funds that have gone down 15% or 20% in a month or two. Getting into the market with lower amounts will ensure that you’re able to deal with this volatility and get a grasp on how you feel about the market and feel more confident going in with bigger sums later on.
If you’re starting off then it is likely that you are in your twenties and still have a good 30 – 40 years of investing ahead of you, don’t rush to put all in and then later find out that you weren’t ready to risk that much money. More than losing the money, it will turn you away from the market completely and that means you lose out on what is potentially a great opportunity to steadily grow your money in years to come.
This is the last post of this series, and I must admit this was a lot harder than I thought it will be and took a lot longer than I thought it would take, so if you found it useful please do forward the links to your friends, and as always, all comments are welcome!
- Part 1: How should beginners approach investing in the stock market?
- Part 2: How should beginners approach investing in the stock market?
- Part 3: How should beginners approach investing in the stock market?
- Part 4: How should beginners approach investing in the stock market?