For your equity investments you could consider investing in an index mutual fund or an exchange traded fund (ETF). An index fund is one that invests in stocks of an underlying index in the same proportion as stipulated by the index. It is, therefore, expected to provide returns very similar to that of the underlying index. For example, if you invest in a Sensex index fund and the Sensex moves from 10,000 to 12000, then your investment of Rs 100 is expected to grow to Rs 120. An ETF is very similar to an index fund except that it is traded on the stock market and therefore has to be purchased through a stock broker or an online brokerage account. A small brokerage of about 0.5-0.75 per cent will be charged by the broker on this purchase. I suggest that you could invest the Rs 60,000 in an ETF such as Nifty BeES which is expected to replicate the returns of the Nifty Index. For the Rs 5,000-6,000 per month, you could start a monthly SIP with an index fund such as Franklin Templeton Index Fund-Sensex plan.
I want to invest in mutual funds but dont know how or where. Please help.
Ravi Chandran, Chennai
Before investing in mutual funds you should be aware of the various types of mutual funds. Broadly speaking, mutual funds can be divided into three categories: equity funds, debt funds and balanced funds.
As the name implies, equity funds are those that invest in stocks of companies listed on the stock exchange. As prices of these stocks rise the net asset value (NAV) of the mutual fund also rises.
This translates into an increase in the value of your investment. Similarly, a fall in stock prices will cause a drop in the value of your investments.
Debt funds are those that invest in bonds, debentures etc issued by the government or by corporates. Typically the value of these funds is linked to the rise and fall in interest rates. As interest rates rise the value of your investment will fall and vice versa. There are a number of funds in this category such as liquid funds (used for keeping money for a short duration), gilt funds (those that invest predominantly in government securities), bond funds (invest most of their capital in corporate bonds), etc.
Finally, there are balanced funds that invest a certain percentage in equities and the rest in bonds. In simplified terms, they can be viewed as a combination of an equity and debt fund.
Depending upon your risk appetite, investment horizon and financial goals, a suitable mutual fund can be chosen by you. I would suggest you visit a professional such as a Certified Financial Planner who will guide you in this regard. A list of practicing Certified Financial Planners in your area is available at the Financial Planning Standards Board of India website www.fpsb.co.in.
Suppose the Sensex rises to 18,000 in another two years, will my investments in mutual funds done at 9,000 get doubled Am I making a mistake by not investing in stocks directly and opting for mutual funds instead
U Date, Mumbai
If you are using a low-cost index mutual fund that tracks the BSE Sensex, then it is expected that your investments made when the Sensex was at 9,000 will be very close to double once it touches 18,000. However, in case of other non-index equity funds the investment amount may go higher or lower depending upon whether the mutual fund does better or worse than the Sensex.
Investing in stocks directly takes a lot of knowledge and time. Therefore, unless one possesses the requisite expertise in the field it is better to use a diversified mutual fund or a low-cost index fund to benefit from stock market investing.