I am a bibliophile who loves to read about new concepts and ideas. The next step almost always involves testing them out in real life.
Venturing Outside My Comfort Zone (Financially)
I started investing in mutual funds in India 4 years back. It has been a rollercoaster ride.
I was skeptical about getting into mutual funds because my family had never mentioned investing in them before. It was a new zone for me, and I was wary of it. After all, movies and social media keep narrating horror stories of people who lost money in stocks. Though you are not investing in stocks directly in mutual funds but indirectly through units, it still felt tricky.
Some self-questioning was involved – "Are mutual funds safe?" "Is it even worth investing in mutual funds in India?" "Will I lose money?"
Usually, when you are in doubt, you ask people around you to gain some clarity. To my dismay, I realized, not many in India know about mutual funds. We prefer keeping our money in Fixed Deposits (FDs) because we consider stocks and mutual funds as danger zones.
I knew I had to do extensive research. I wanted to invest my capital safely and securely in a top performing mutual fund. For this, I was willing to learn. I knew if I gained more knowledge on the subject, it would ease my decision-making – whether to invest in mutual funds or not. I went through a lot of research material online and then finally decided to take the plunge.
This page covers the following:
- Why Mutual Funds?
- The Type of Mutual Fund I Invested In First
- My ROI After 4 Years - Am I Happy With My Returns?
- The Mistakes I Made
Disclaimer: The AMCs, schemes, and mutual funds on this page should be treated as examples, not as investment advice.
Why Mutual Funds? Why Not Term Deposits? Or Stocks?
There are a couple of reasons I chose mutual funds over FDs and stocks to invest in:
- The prime reason was that I was looking for new ways to save income tax.
- The interest earned from FDs barely beat inflation.
- I was not ready to invest in stocks because they require much research. I did not have enough time for fundamental or technical analysis – 2 essential studies needed before investing in a company's stock. Enough material (in various formats like web, pdf, excel, ppt) is available on company websites and fintech sites if you are up for the research.
- I wanted a professional to handle my capital. In mutual funds, an experienced fund manager takes care of your money.
- Mutual funds in India are also permitted to invest in real estate (including REITs). It is a great way to diversify your portfolio. Banks like SBI offer a gold fund for those interested in investing like the SBI ETF-Gold. You can also invest in short-term debt securities. Nowadays, there are even mutual funds in India holding US stocks (like PPFAS).
- With the launch of online fintech companies like Zerodha and Groww, I was motivated to try mutual funds. You can quickly complete all formalities (like KYC) online. You can also easily view a list of all mutual funds in India and filter the ones you need.
Out of India's 1 Billion population, only 3% invest in the stock markets. In China, it is 12%, and in the UK, it is 33%. The USA reports the highest at 55%.
The First Mutual Fund Type I Invested In: ELSS
Equity Linked Saving Scheme (ELSS) mutual funds are tax-saving schemes with a lock-in period of 3 years.
Many Asset Management Companies (AMCs) offer ELSS schemes like Tata, Nippon India, Reliance, IDFC, DSP, etc. I did some research to find out the best mutual funds in India to invest in via SIP. Out of my ignorance, I chose 3 ELSS mutual fund schemes from 3 different AMCs. You need to invest only in one. By investing in 3, I over-diversified and overexposed my portfolio to the same kind of companies.
There was no getting out of it now, as the lock-in period is three years in India.
Am I Happy with the ROI?
My absolute mutual fund returns are at 34.3%, and XIRR stands at 29.22% in my 4th year of investing. I have 5 SIPs running, including the ELSS schemes.
I am happy with the growth of my returns. I have gained some trust, though it is still too early to tell as ELSS schemes can be volatile until 7-8 years. Also, the Indian market is at an overvalued zone right now with the largest ever bull run, so I am not getting my hopes high.
I have set the long-term ROI target for my mutual fund investments at a conservative rate of 12%. You can use SIP calculators online to estimate your returns based on your target percentage.
My returns were negative in the first three years! I even contemplated withdrawing my funds back then. Finally, in the 3rd year, my mutual funds started picking up.
The snapshots are from the online fintech platform I invest in.
It shows my investment trajectory with 8 mutual funds and 5 SIPs.
The regular ELSS scheme SIPs are defunct after I moved to direct schemes. I have not withdrawn my funds from the regular schemes yet. After gaining some confidence, I began investing in a balanced advantage fund (a mix of debt and equity) and a multi-cap fund.
Caution: My portfolio is highly volatile as a big chunk of it is in equity. I am okay with this as I am single with no responsibilities. You should not use my asset allocation if you are nearing retirement age or you have dependents. Please consult a SEBI-registered financial advisor before making any investment decisions.
Common Mutual Fund Investing Mistakes
Even after doing thorough research, I ended up making the following mistakes that are pretty common for a mutual fund investor:
- I invested in the same kind of mutual funds (ELSS) thrice, each in a different company.
- I invested in the regular schemes and not in the direct plans. Regular schemes involve broker commissions and, therefore, a higher expense ratio (lesser returns). If you are investing online, you can do away with such commissions and invest directly.
- I went through the top 10 mutual funds in India list to select the highest 1-year returns and rank. With 4 years of experience, I can confidently say that a mutual fund's history or current situation is not always the best indicator of future returns or performance. The mutual funds I chose were initially ranked at 4 or 5. Now they are ranked 3. The safest mutual funds are always those that show consistent performance over 5-10 years.
- I got jittery and impatient. I saw negative mutual fund returns in the first 3 years. One thing that stopped me from exiting was the ELSS lock-in period of 3 years. I am glad now that I could not cancel my investment SIPs. If you have invested in a high-risk, high volatile fund, wait for a minimum of 3-4 years before making any extreme decisions.
So to answer my question, I would say "YES! Mutual funds are worth the investment in India."
If you are a conservative investor, you should invest in balanced or debt funds with high-quality securities in India. They are not devoid of risk, but they are comparatively safer than equity funds because they target wealth stability and preservation.
If you are okay with risk, you can try aggressive funds like ELSS. Such schemes aim at wealth creation and growth. ELSS offers the additional benefit of tax-saving.
There is always a mutual fund for everyone.
In the end, it all depends on your risk appetite.
- "Population Participating in Stocks by Country" by Swastika. Published on 31st August 2021.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2021 Kalpana Iyer