Young Earners Guide to Mutual Fund Investing

This post is meant for young earners’ who would like to begin mutual fund investments at the start of their career. I write this following a reader’s suggestion (unable to locate the comment -apologies).

The contents of this post is subject to the following assumptions:

  • The investment would be used for financial independence later in life and that no other goal is in the horizon.
  • Basic fortifications like emergency fund, life insurance (if there are dependents), health insurance (for parents and self) are in place.
  • The young earner understands the importance of equity exposure

There are several articles on what a mutual fund is, different types of mutual funds, how to invest in direct mutual funds etc. So I choose not to reinvent the wheel here.

Part 1: How to select an equity mutual fund -preamble

Part 2: How to select an equity mutual fund – Creating a shortlist

Part 3: How to select an equity mutual fund – Making a Choice!

Direct Equity vs. Equity Mutual Funds

I think there is absolutely no need for an individual ( young or old) to invest in direct equity. Equity mutual funds if held onto for a long enough period of time, is  more than likely to beat inflation and even give you a little extra after expenses.

Perhaps one can hasten financial independence with direct equity exposure but such a path is fraught with peril.

That said, in my uninformed opinion,  gradually accumulating and holding solid large cap companies instead of chasing multi-baggers is a decent way to ‘create wealth’. See this for more details:  Backtesting a three stock portfolio

Naturally one must learn how to choose a solid business before taking the plunge. Since this would take a while, I suggest the following:

1) Start a SIP in a single large cap fund or a large and mid-cap fund: you can consider consulting this three-part series:

Part 1: How to select an equity mutual fund -preamble

Part 2: How to select an equity mutual fund – Creating a shortlist

Part 3: How to select an equity mutual fund – Making a Choice!

2) If you need to save tax, use an ELSS fund. You don’t really need a PPF account. Just use ELSS + EPF + Term insurance premium (if applicable) for tax savings. That can be your first and only fund if your investment is small.

Personally, I hate SIPs in ELSS funds (because getting rid of a poor performer would seem like forever). If you are okay with it, go for it. Just be sure to discontinue the SIP (and switch to another fund) after your EPF exceeds the 80C limit.

3) If you don’t care for direct equity, then that is all that you need to do!

  • As and when you get extra cash, buy more units Either in the ELSS fund (if you have not exhausted 80C limits) or in the large and mid-cap fund.
  • Do not monitor the value of your investment for 5 years! Monitor only how much you invest (try this monthly tracker).

4) If you wish to get into direct equity, then obviously you must learn. There are many useful resources. I prefer:
tyroinvestor.com , stableinvestor.com  cognicrafting and the resources mentioned in them.

These are written by passionate youngsters who are learning on the fly and do not hold anything back. I would prefer to learn from them any day compared to an ‘expert’ who runs a business.

You can consider learning from the master: R. Balakrishnan Video: R. Balakrishnan on “investing for keeps: in equities I trust”

His recent post will also help: How to select shares

We have a lifetime to learn and invest in equities. So there is no flaming hurry. Get the mutual fund investment going, learn in leisure and invest when you feel comfortable and ready.

Mr. Raghu Ramamurthy a patron of freefincal is 87  years young an active stock investor!

Stock investing requires capital. Perhaps a few years of mutual fund investing could provide the necessary seed capital for the stock investor …. perhaps. Do understand the risks in doing so.

DIY vs. Professional Help

While a young earner is best suited for DIY (do it yourself), taking professional help and then learning in one owns pace is also a fantastic idea.
Young earners are often under a lot of stress. So professional help could help calm nerves and enable them to focus on their career better.

I would recommend starting a relationship with aSEBI registered  fee-only planner who would provide advice free from conflict of interest. They are the only people who can legally provide investment advice. SEBI has cautioned investors not to deal with people who are not registered.

Either way, the learning cannot be skipped!

Regular plans vs. Direct plans

There is no debate here.

DIY and choose direct mutual fund plans because they would provide you anywhere between 0.5% – 1% return more return for each year you stay invested

or

Seek a SEBI registered fee-only planner and invest in direct mutual funds as per their guidance.

There is absolutely no need to choose an investment portal that offers regular funds in exchange for ‘convenience’. Mutual funds are for investing and not for trading. If convenience is a ‘must’ then I suggest you wait for the direct mutual fund portals that are ‘coming soon’.

Trust the planner. Do not post their recommendations in forums for ‘double-checking’. A second opinion with an individual is okay but do think twice before messaging  Ashal Jauhari for help!

Ashal: I think you should insist that people who ask your extensive help should donate to a charity and show you the receipt before you advice them.

Finally,

  • Never ever buy mutual funds from a bank.
  • Do not buy an NFO because  it is an NFO.
  • Do not buy/sell a fund because others are talking highly/lowly about it.
  • Do not clutter your portfolio. Choose a minimalist portfolio.

To sum it up, choose ONE fund, invest with discipline. Do not look the folio value for at least 5 years. In the meanwhile learn about stock investing, if you must. Seek professional advice and not free lunch if you lack confidence.
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30 thoughts on “Young Earners Guide to Mutual Fund Investing

  1. Ashal Jauhari

    Dear Pattabiraman Murari, I have shared the details of bank account for my friend's charity organization in Asan Ideas for Wealth.

    MISHA
    HDFC a/c No-50200006373779
    Branch- Janpath Branch, Bhubaneswar
    IFSC Code-HDFC0000122

    Reply
  2. Ashal Jauhari

    Dear Pattabiraman Murari, I have shared the details of bank account for my friend's charity organization in Asan Ideas for Wealth.

    MISHA
    HDFC a/c No-50200006373779
    Branch- Janpath Branch, Bhubaneswar
    IFSC Code-HDFC0000122

    Reply
  3. Kuntal Das

    nice post dear Pattu, hard hitting & in your face. Perhaps most of us need a little shock therapy now and then. In this age of over-information, not to be shaken by the constant bombardment of news is a real challenge.

    Reply
  4. Kuntal Das

    nice post dear Pattu, hard hitting & in your face. Perhaps most of us need a little shock therapy now and then. In this age of over-information, not to be shaken by the constant bombardment of news is a real challenge.

    Reply
  5. Krishnan

    Quote - "That said, in my uninformed opinion, gradually accumulating and holding solid large cap companies instead of chasing multi-baggers is a decent way to ‘create wealth’. See this for more details: Backtesting a three stock portfolio"
    Sir, axis bank contributed significantly to the three stock porfolio you have discussed. Axis bank is a large cap now; but in the period you have back tested (since 2000) it was smallcap/mid cap and it has given a returns about 20 times that of Nifty and was clearly a multi bagger. Any future projections based on this back testing would apply only if you pick a multi bagger again.

    Reply
    1. pattu

      Fair enough. Can you point me to 3 stocks that were large cap in 2000 and are still large caps? Will be happy to reproduce the analysis.

      Reply
      1. Krishnan

        That is the point I was trying to making. The criteria that it had remained a large cap for 15 years disqualifies half of today's large caps (IT, private banks, Telecom etc). At least one in three of the large cap you picked in 2000 would have turned out to be dud and disappeared from the radar. Similarly, if you pick and invest in 3 large caps today they may not remain so after 15 years. Indian indices have a very high churn rate; So this strategy of picking 3 large caps is fraught with danger. In my opinion, if you want to directly invest in stocks you got to monitor the companies and be ready to change with the wind; a passive strategy over a long period is very risky. A passive strategy works better with index ETF or mutual funds. Somebody investing in large caps in the early nineties (and adamantly sticking with it) , for instance, would have invested in cements and old manufacturing companies and missed the Technology and the banking boom.

        Reply
  6. Krishnan

    Quote - "That said, in my uninformed opinion, gradually accumulating and holding solid large cap companies instead of chasing multi-baggers is a decent way to ‘create wealth’. See this for more details: Backtesting a three stock portfolio"
    Sir, axis bank contributed significantly to the three stock porfolio you have discussed. Axis bank is a large cap now; but in the period you have back tested (since 2000) it was smallcap/mid cap and it has given a returns about 20 times that of Nifty and was clearly a multi bagger. Any future projections based on this back testing would apply only if you pick a multi bagger again.

    Reply
    1. pattu

      Fair enough. Can you point me to 3 stocks that were large cap in 2000 and are still large caps? Will be happy to reproduce the analysis.

      Reply
      1. Krishnan

        That is the point I was trying to making. The criteria that it had remained a large cap for 15 years disqualifies half of today's large caps (IT, private banks, Telecom etc). At least one in three of the large cap you picked in 2000 would have turned out to be dud and disappeared from the radar. Similarly, if you pick and invest in 3 large caps today they may not remain so after 15 years. Indian indices have a very high churn rate; So this strategy of picking 3 large caps is fraught with danger. In my opinion, if you want to directly invest in stocks you got to monitor the companies and be ready to change with the wind; a passive strategy over a long period is very risky. A passive strategy works better with index ETF or mutual funds. Somebody investing in large caps in the early nineties (and adamantly sticking with it) , for instance, would have invested in cements and old manufacturing companies and missed the Technology and the banking boom.

        Reply
  7. chandan kumar

    Why Never ever buy mutual funds from a bank, do you elaborate this Please!! I already have some MF SIP investment with association of bank, but not able to figure out what is the issue with this?

    Reply
    1. pattu

      If you know what you are buying and ask for a scheme it is fine. Otherwise they will thrust stuff on you. Bankers get more commissions than other agents.

      Reply
  8. chandan kumar

    Why Never ever buy mutual funds from a bank, do you elaborate this Please!! I already have some MF SIP investment with association of bank, but not able to figure out what is the issue with this?

    Reply
    1. pattu

      If you know what you are buying and ask for a scheme it is fine. Otherwise they will thrust stuff on you. Bankers get more commissions than other agents.

      Reply
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    Reply
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