A friend recently asked me about how to invest in mutual funds.
He said that he was aware of the concept of mutual funds and was ready to invest Rs 10,000 every month for next decade or so.
As a friend, I was really happy that there are still people in my generation who are interested in investing for decades and not months. I decided that it would be interesting to share what I told him with my readers too.
Before, I gave him any advice, I confirmed the following –
- He is adequately insured.
- He has health insurance.
- He has money in liquid assets to act as emergency funds.
- He is already using his 1 lac limit for saving taxes. So, I didn’t check for tax saver funds.
- He contributes to his PPF account regularly.
- He would not require this money which goes into mutual funds for atleast next 5 years.
- He is not interested in investing directly in equities.
The last one was to ensure that he was not investing in long term assets with an assumption of making money in short term. Also, anything less than 5 years may not be a good idea when discussing instruments which depend on equity markets.
I advised him to divide his 10K into 3 parts - 4K, 3K & 3K. I think 3 funds would offer sufficient diversification. I suggested him the following 3 funds to start a Systematic Investment Plan:
|How to divide 10K among 3 different Mutual Fund Schemes|
I chose these funds because these have been in existence for atleast a decade. Hence they have proven themselves over multiple market cycles, i.e. ups and downs.
These funds may not give the best returns among the available universe of funds. But they have historically stayed in top 10% consistently. And that is no mean achievement considering the volatile nature of Indian stock markets.
Also, these funds don’t fall as much as the market does during correction.
I also suggested that he should go for GROWTH option and not DIVIDEND payout or reinvestment one. This choice is based on the principle of compounding.
Now this approach may not be the best one or the perfect one. But it is a sane, simple and easy to implement.
What do you think?