Great! You have already completed the step one: Decide you want to do it.
Below, we will discuss how to start investing, which instrument, phases of investing, including a model portfolio to start investing, understanding your risk appetite and finally how to build best portfolio for yourself. I will not talk about setting goals or how spend less as that has nothing to with investing.
Investing sounds scary but it’s not. It’s just fear of unknown. I can promise you if you stay you will make money and have fun too.
Broadly, Investment is of 3 types:
Debt (Giving Loan):
- Saving Account: Very Low Returns
- FD/RD: Fixed Maturity
- Debt Mutual Funds: Lower Returns than Equities
Equity (Buying Shares):
- Stocks: Very Risky
- Equity Mutual Funds: Risky is short-term
- Gold: Low Returns
- Real Estate: No liquidity
Out of these, I will only talk about Stocks and Mutual Funds as rest you might already know.
- Stocks: Investing directly in companies
- Mutual Funds: Indirect way to invest in stocks or bonds
For early investors, stocks are very risky. So, I would suggest them to start with mutual funds and once you start understanding them then explore stocks. The only difference is that in mutual funds you are leaving day to day management (buy/sell decision and execution) to a professional fund manager.
Phases to Start Investing:
So, like everything that is new in life, we should learn investing also in phases.
- Just Started: Have no clue
- Introspection: You tried stuff but you made some lost some
- Exploit: Making money from years
Phase 1: Just Started
Think of it, like your first year of graduation (engineering, etc) when you don’t really know what you are good at or what you really supposed to do. So, the best way to learn investing is to do it and learn more about in the process yourself.
You just need to do following steps:
- Try out: Invest in different categories of mutual funds
Idea is try out each category so that you can experience risk and returns from each category. So, I have selected mutual funds 4 main categories that define most of the risk and return spectrum.
- Debt Short-Term: Expectation in this category is to get above FD returns and low risk. Also, ability to withdraw without any penalty.
- Hybrid Balanced: It’s a mix of Debt and Equity. It provides 12-14% returns with moderate level of risk.
- Equity ELSS: I picked this category due to it’s dual benefit of 80C as well as good returns in 16-18% range with moderately high level of risk.
- Equity Small Cap: It invest in stocks of small companies. It provides 18-22% returns with high level of risk.
2. Start small: Invest only minimum amount in reputed fund
To implement the same, I have created a model portfolio. I choose mutual funds which have lower minimum investment and top rated in their respective category.
- Birla SL Treasury Optimizer Debt: Short-Term Rs. 1000
- DSP BR Balanced Fund Hybrid: Balanced Rs. 1000
- Axis Long Term Equity Fund Equity: ELSS(MultiCap) Rs. 1000
- DSP BR Micro Cap Fund Equity: Small Cap Rs. 1000
Phase 2: Introspect
Now, track these fund for on weekly basis probably every Sunday and keep note of your feelings. Overtime, you will realize what kind risk and returns are suitable for you. You can do this without putting any money also but it will be better if you invest.
Phase 3: Exploit
By now you know yourself, your risk preferences and kind of category you like to really invest in. Next step is to make most of it by creating a portfolio that suits you and investing regularly all possible amount in it.
Let me take an example where a person realizes she is ok with moderate risk category. Based on this information, now you create a portfolio of mutual fund which falls in that risk category.
One very basic example of Moderate Risk Portfolio:
- HDFC Balanced Fund: Balanced 50%
- Tata Balanced Fund: Balanced 50%
Or you can try to build bit complicated portfolio like All Weather Portfolio.
Now you mastered basic mutual funds, next you can explore even advanced options. Advanced options include sector focussed mutual funds (to take calls on sectors), global mutual funds and stocks.