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Friday, February 17, 2006

Beginners guide to Mutual Funds

1. Mutual funds are simply vehicles of investments

Your real investments are the securities these mutual funds finally invest in. The final securities can be, for simplicity's sake, divided into equity (shares), debt (fixed return) and real estate (property).

Your returns will be generated by the fund's investments. For instance, the returns on an equity fund will be determined by the stocks your fund manager invests in and the state of the stock market.

2. Be practical and realistic

As a simple principle for a beginner, it would help you if you choose where to invest. In other words, how much should you invest in debt, equity and real estate.

Make this decision on the assumption that you will get the normal returns expected from such instruments. Don't invest on the assumption that you will beat the market. Don't invest with the assumption that you will get 40% returns from equity or 18% from debt.

Be realistic. Here's a rough estimate of the returns you will get depending on the kind of investment you choose (remember to factor in inflation, which will be around 5.5%), debt -- 6%, equity -- 16%, real estate -- 8%.

3. Invest according to your time horizon

Money that can be put away for 7-10 years can be invested in equity. Property might be okay for a slightly shorter time horizon, say 7-10 years. The rest must be invested in debt.

4. Do not jump in and out of your investments

Your investment returns are substantially determined by your behaviour. If you get in and get out at the wrong times, a good investment will be no good for you.

Start by educating yourself about mutual funds. Invest in a floating rate income fund. These funds invest in fixed return investments that have a floating rate of interest, as against a fixed rate of interest.

Once you are comfortable with and understand the concept of mutual funds, you could start participating in equity.

Diversified equity funds are a lower risk than sectoral funds. Diversified equity funds invest in shares of various companies of various sectors. Sector funds invest only in stocks of a particular sector.

If you decide to take financial advice, which I know at some point you will consider, please consider fee-only planners. Going to a planner who gets commissions on what he sells will result in him trying to convince you to buy products he is selling and making money on.

3 Comments:

Blogger madmita said...

This comment has been removed by a blog administrator.

3:05 AM  
Blogger madmita said...

Why do we need two Stock Exchanges?
[NSE and BSE]

7:38 PM  
Blogger Febian said...

There are not just two Stock Exchanges in India. There are many many more... BSE & NSE are the big players.

Here's a map of stock exchanges of India..
http://www.mapsofindia.com/maps/india/stock_exchange.htm

7:48 AM  

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