Part 2 of MF FAQ: 20 Basic Questions on mutual funds answered

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As mentioned last week,  I would like to compile a set of 100(+) basic and elementary newbie questions & answers on mutual funds. This is the second batch of 20 (actually 45!). Do share this with any of your contacts who would like to begin or have just started investing in mutual funds.

Did not read the last couple of posts? You can always catch now!

Annoucement I may not like SIPs much, but I have signed up for a SIP created by SEBI RIA Melvin Joseph that will work in bull and bear markets! It will change your life and not just your life! Details on Oct 2nd. 

Kindly note, this is not an FAQ that will inspire people to start investing in mutual funds. This FAQ represents the cold hard truth. My goal is to make them holistic and sequential, pointing out information that is not necessary from time to time. The questions will start from number 21 because 1-20 are here: MF FAQ: 20 Basic Questions on mutual funds answered – part one

21 How do I invest in a SIP? You cannot! You invest in mutual funds and when you buy mutual fund units automatically each month on the same date it is called a SIP. By the way, you do not need a SIP, and I strongly believe that you should not start a SIP.

22 I am surprised that you do not want new investors to start a SIP, but instead, want them to start with an investment of Rs. 5000. Why do you not want people to start SIPs?  If you are surprised it is because you have been brainwashed by the junk that fund houses guys, their sale guys or silly journalists write. A mutual fund is a market-linked product where returns can fluctuate wildly. So the associated risk must be actively managed. A SIP does not put people in the right mindset for this. In fact, all fund houses and sales guys want you to do is to keep running a SIP and never close it.

They will never tell you about the risks because this means you will exit and that means fewer profits for them. So you need to have a hands-on approach to both investing and risk management. Manually investing each month is also systematic investing. Practice this and you can soon learn systematic risk management too.

23 I don’t like your advice, I want to start SIPs and then learn systematic risk management. Will I be doing something wrong? You talked about risk management. So you are not one of those brainwashed zombies. Good for you. Sure, you can start your SIPs and practice systematic risk management too. This is how: How to systematically reduce the risk associated with a SIP

Also, a manual SIPs also has pros and cons depending on the individual traits of a person. See: Manual Systematic Investment Plan (MSIP): Pros and Cons

So if you must start a SIP, watch that first Rs. 5000 you invested move up and down in value for a few weeks and then start one. I would, however, urge you to try an Rs. 100o or Rs. 500 manual investment directly with the AMC. It will take 30 seconds of your life, well maybe 45 seconds the first time. If you like it, keep doing it.

24 I think what you are suggesting is irresponsible and does take into account practical aspects of behavioural finance.  Dude, this is an FAQ and you have to ask a question! Anyway, do I look like the kind of guy who worries about what other people think?

25 Also if people do not start SIPs, they will stop investing when the market goes down. Don’t you care? I don’t. Their money, their life. Since it is anyway easy to stop or pause a SIP online, they would be doing it anyway.

26 What should be my first mutual fund?  Do not ask this question unless you have a clear financial goal; when you will need the money; how much of equity you should have for that goal (0% or 30% or 60% etc); where you will invest the rest of the money (fixed income instrument). If you do know how to do all this, download the Freefincal Robo Advisory Software Template and create a financial plan first. There is no hurry. If you invest first and plan later, it will be a mess. So take your time.

27 I want to save tax, can my first mutual fund be an ELSS fund? Well, it can be, but once you go through the above steps, you will recognise that tax saving is only incidental. Once you have the right asset allocation (how much equity to invest in and how much-fixed income to invest in), you will realise it does not matter what you select to save tax in. I would recommend that you do not use ELSS funds if you can save tax with EPF + VPF or mandatory NPS.

28 How does a SIP in ELSS work? What did I just tell you?! Anyways, each unit you purchase from an ELSS fund will be locked in for 3 years. So the units you buy each month via SIP will each be locked for 3 years. So 3 years after you started the SIP, only the units you purchased the first month will be free from lock-in, and so on.

29 How much return can I expect from an equity fund after 3 years? Let me think for a moment …. anywhere between -65% to + 89% (no I am not making this up).

30 How much return can I expect from an equity after 30 years? Anywhere between 3% to 16.72% (no I am not making this up either, well just a little bit). The point is when returns are not guaranteed, why are you expecting anything? This is why I keep saying don’t fall into the SIPing trap. Ask the right question partner! Like to see some data? See: Sensex Charts 35 year returns analysis – stock market returns vs risk distribution

31 I am planning for a 15-year investment and want to hold 60% equity in the initial years. How much return can I expect? Nice try, but you can do better than this. Try again.

32 I am planning for a 15-year investment and want to hold 60% equity in the initial years. What can I expect during the course of this investment? Now, this I like! So when you hold 60% equity, expect the entire portfolio to fall in value by at least 40-50% (not making this up). That is not going to be easy to face for anyone, expert or novice. So I would strongly recommend that you plan for a 10% return from equity after tax. Expect less and you not be disappointed!

I like writing posts with “expect” in the title! Check these out:

What Return Can I Expect From Equity Over the Long-term? Part 1

What Return Can I Expect From Equity Over the Long-term? Part 2

34 How much equity should I hold in my portfolio? Good question! That is more important than where to invest. Simple thumb rules. Avoid all equity for money that you need within 5 years. Include only 20-30% equity for money needed between 5-10 years. Above that, you can increase gradually, but do not go above 50-60%. You need a good amount of fixed income in your portfolio. Watch this for more clarity.

35 I am young, why can’t I hold 100% equity for some years and then reduce it? Yeah, and I am Superman. You need therapy dude. You have been brainwashed into believing “over the long term” equity will give good returns. No, it will not. By holding 100% equity, you will lose precious time and money if you have a bad sequence of returns from the market. Safety first. Adventure later.

36 So I tried out your robo template and it says I need 60% equity for my goal. What does this mean? How do I go about this? This means that your portfolio should have close to 60% of equity at any time. This may be too much too soon for many new investors. So I would recommend that you start small. Say you are investing Rs. 1000 a month, allocate Rs. 800 to fixed income and Rs. 200 to equity and gradually increase equity to Rs. 600 over the next few months. Another reason what you should not start stupid SIPs.

37 Okay, I am finally ready to invest. Give a straight answer – what should be my first mutual fund? Assuming you are planning for a long-term goal like financial independence, I will give you three choices:

A: If you are an adventurous investor, and are young (<30), choose UTI Nifty Next 50 Direct Plan Growth Option (there is one from ICICI too)

B: If you are scared and want active risk management, choose Quantum Long Term Equity Direct Plan Growth Option or HDFC Hybrid Equity Fund or Franklin India Equity Hybrid fund. The hybrid funds will have a mix of equity and fixed income (bonds) and this will lower risk a little.

38 How many equity funds should I choose? Start with one and stick with one for at least 1-2 years.

39 What only one? Should I not be diversifying my portfolio? Yeah, yeah you should, but most people di-worsify their portfolio by buying more. So don’t be in a hurry. Stick with one, it will give you all the diversification that you need for now.

41 I can invest Rs. 5000 a month and want to split it up into five Rs. 1000 SIPs. Please suggest best funds to invest in Don’t do stupid things like. If you must start a SIP, then start ONE for Rs. 5000 a month.

42 But is not splitting money and investing in 4-5 funds a good way to spread risk and average returns? No, it is a good way to fool yourself that you are doing all that.

43 What is an NFO?  You don’t need to know because you don’t need it.

44 Does the NAV of a mutual fund include its expenses? Every day mutual fund declare the NAV after about 8 pm or so. Before they declare the NAV, they will promptly remove the expenses for the fund and in the case of regular plans, commissions also. So the NAV is after expenses are factored in and all mutual fund returns that you see are after expenses and commissions.

45 I just started my SIPs and I want to learn about this “risk management” nonsense you keep blabbing about. Point me to a source.

Sure! Try this from my youtube channel (hit subscribe and press the bell while you are there)

In part 3, we will discuss types of funds, taxation etc and ruffle sensitivities even further. Cheers!

Did not read the last couple of posts? You can always catch now!

Annoucement I may not like SIPs much, but I have signed up for a SIP created by SEBI RIA Melvin Joseph that will work in bull and bear markets! It will change your life and not just your life! Details on Oct 2nd. Stay tuned!

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. THANK You mate, first article that I read which was completely non biased and in line of my thoughts which I gathered with my own research of direct and regular mf’s

  2. “I would recommend that you do not use ELSS funds if you can save tax with EPF + VPF or mandatory NPS.”

    Why do you suggest this? Isn’t ELSS gives better returns than EPF, VPF and NPS?

    And is NPS mandatory?

  3. Dear Sir,

    Thanks for sharing and keep us knowledgeable, i am now regular reader of your blogs.

    One request i have find many blogs on tax savings and how you can save tax using INDEXATION / cii index etc… But all those blogs are before ltcg implementation. If you can spare some time and blog on it with examples like x amount y profit.

    I know i am asking too much.


    1. ltcg implementation meaning for equity? That has nothing to do with indexation. I have shown examples of indexation in many posts before.

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