Equity investing for millennials

Equity investing is simple but not easy.

Why?

Because investing in stocks or equity mutual funds is very simple - all you need is a call to your mutual fund broker or a mobile app and you click some buttons and voila! you get a message:

Your transaction is successful.

But it is not easy. There are 45 different companies, and more than 1500+ schemes to choose from - each one with a different management style, different equity allocation, different tenure, and different taxability.

Some call it a game of chance.

You may end up with a 4% return or 14% return after say 5 years.

It need not be, because if you leave it to chance, and god forbid if the scheme’s return turns out to be just 4%, you miss on the golden years of compounding return at high double-digit. Once missed, those years are not going to come back.

Such incidents have led to potential investors shying away from an otherwise lucrative and scientific investment avenue. Here are some benefits of investing in mutual funds:

• Potential for Inflation beating Returns over long term

Investing in the stock market certainly gives you the opportunity to get long term capital appreciation, although this comes with an element of risk. But then, every asset class carries some form of risk.

While past performance is not a guarantee for future returns, over the years, equity as an asset class has given good returns. However, just by investing in equity, one does not get a guarantee of high returns. You need to remain patient and keep reviewing your portfolio while maintaining the long-term time horizon.

• Diversification of Risk

Among mutual funds, a liquid fund is a low risk product, while equity funds carry a higher level of risk. However, most diversified equity mutual funds, based on their investment objective, hold scrips of 30-40 individual companies. Hence, when you invest in an equity fund, you automatically achieve diversification.

For example, the IDFC Focused Equity Fund, which is an open-ended equity scheme, invests in a maximum of 30 stocks with a multi-cap focus.

• High Liquidity

Most equity investments in mutual funds are liquid. In case a need arises, one can redeem funds in 2-3 working days. Moreover, since equity funds are held in terms of units, one can order partial redemptions based on the amount one needs.

Generally, there is no exit load if funds are redeemed after a year of unit allotment. You can easily redeem them online and are based on the NAV on the day subject to cut-off timings. The money is paid to the registered bank account.

• Low Capital Requirement

Unlike asset classes like real estate, bullion, or fixed deposits, equity mutual funds do not warrant lump-sum amounts. One can start investing with as little as Rs. 500 a month. The low threshold allows investors from all backgrounds to participate in mutual funds. With the age of pre-defined pension benefits all but over, equity investment can not only generate inflation-adjusted returns but also help you build a sizeable corpus for essential life goals like retirement.

How to review/ identify the schemes to invest?

Step 1: Review your existing portfolio and sell the schemes which have grown at single digit in last 3 years. 

Step 2: Identify the schemes which have AUM between Rs. 500 crores to Rs. 10000 with a good fund manager, sound portfolio of stocks

Step 3: Check the "Beta" of the portfolio which denotes how vulnerable your portfolio is when the market falls

Step 4: Allocate your capital prudently between 8-10 schemes - debt and equity combines based on your risk profile

Step 5: Follow any updates in the fund such as - fund management changes, strategy changes, any abrupt changes in the portfolio etc.

Step 6: Let the good schemes compound without any hindrance and do not be tempted to add new schemes every now and then. Instead, if you want to make additional investments or increase the SIP in the existing schemes only. 

If you haven't reviewed your portfolio and still hold 30-40-50 schemes, then it would be prudent to consult someone and get it right. If you would like to connect with me, write an email to [email protected]. I would be happy to help you out.