In this article, we will discuss about...
Introduction
Investing can seem overwhelming, especially when you’re just getting started. We’ve already talked about the foundation of financial security—having health and life insurance. Now, let’s move on to Level One of investing: mutual funds.
But before jumping in, there’s one crucial step—building an emergency fund. You should have at least 3 to 6 months of expenses saved in a safe investment like a Fixed Deposit (FD). This fund acts as a safety net in case of emergencies like job loss, so you don’t have to sell your investments at a loss.
Once your emergency fund is in place, you can confidently start investing in mutual funds.
I won’t bore you with definitions—you probably already know what mutual funds are. Instead, I’ll focus on how to invest wisely and avoid common mistakes, so you can build wealth without unnecessary stress.
Don’t let reading hold you back, Watch our video instead
Level One: Getting Started with Mutual Funds
You don’t need a huge sum to start investing. Even if you have just ₹5,000 or ₹10,000, you can begin with a Systematic Investment Plan (SIP).
Many people hesitate to invest because they think they need a lot of money or fear taking risks. Some even make the mistake of jumping straight into trading, which can be risky.
Investing is Like Learning
Investing is a step-by-step process, just like learning. You wouldn’t skip grades in school, right? Similarly, you should build financial knowledge and stability before taking bigger risks.
When you start earning, focus on:
-
Career growth and skill development first.
-
Avoiding get-rich-quick schemes, like speculative stock trading or cryptocurrency investing without proper knowledge.
As a Chartered Accountant, I’ve seen many people in their 40s struggling due to poor financial choices made in their 20s and 30s.
Some lost money due to risky trading, while others invested in startups without proper research. Even Bill Gates has expressed concerns about cryptocurrencies. If a billionaire is cautious, we should be too!
The key to building wealth is stability and discipline. Instead of chasing an extra 1-2% return in the stock market, focus on growing your income. A higher salary means more money to invest smartly over time.
Why Start with SIP?
A common question is: Should I invest through SIP or a lump sum?
The simplest way to start is with SIP because it helps you develop financial discipline. Even if you invest just ₹5,000 per month, it builds a habit of consistent investing.
The Power of Starting Early
-
Investing ₹5,000 per month from age 25 gives you the same financial outcome as
-
Investing ₹50,000 per month from age 35
That’s the power of compounding!
When you receive extra money, like a bonus, you can add a lump sum investment, ideally when the market is down. But remember—always start with SIP.
Direct vs. Broker Investment
Should You Invest Directly or Through a Broker?
You can invest:
-
Directly (through your bank, BSE, or online platforms like Zerodha Coin)
-
Through a broker (if they provide valuable advice)
Why Invest Directly?
-
Broker fees add up significantly over 5-10 years.
-
Investing directly saves money and increases returns.
If your broker doesn’t add much value, why pay extra fees?
Growth vs. Dividend Reinvestment
When choosing a mutual fund, always go for the Growth option instead of Dividend Reinvestment.
-
Growth Option: Your investment compounds without unnecessary taxation.
-
Dividend Reinvestment: Dividends get taxed before reinvestment, reducing long-term returns.
If you want higher long-term returns, Growth is the better choice.
Open-Ended vs. Close-Ended Mutual Funds
Two Main Types of Mutual Funds
Close-Ended Funds:
-
Have a fixed lock-in period (e.g., 3 years).
-
Often offer higher returns since fund managers can invest for the long term.
-
Traded on stock exchanges, so you can sell if needed.
Open-Ended Funds:
-
Allow continuous investment and withdrawal.
-
Often provide lower returns since fund managers must keep liquidity available.
If you don’t need your money for at least 3 years, a close-ended fund may be a better option. Since you already have an emergency fund, you won’t need quick access to this money.
Top 5 Mutual Fund Categories
Instead of searching for the “best” mutual fund, focus on these five proven categories with a strong 5-year track record:
1. Exchange Traded Funds (ETFs)
-
Low-cost investment (expense ratio ~0.16%)
-
Track market indices like Nifty
-
Passively managed (removes human error)
-
Best for first-time investors
2. Large-Cap Mutual Funds
-
Invest in top 100 blue-chip companies in India
-
Provide stability and steady growth
-
Lower risk than mid or small-cap funds
3. Flexi-Cap Mutual Funds
-
Invest across large, mid, and small-cap stocks
-
Fund managers adjust investments based on market conditions
-
Great for long-term wealth creation
4. Contra Mutual Funds
-
Follow a contrarian investment strategy
-
Buy undervalued stocks that others ignore
-
Perform well during market corrections
By investing in these five categories, you can create a well-balanced portfolio with diversification, stability, and long-term growth.
Conclusion:
Mutual funds are one of the easiest ways to start investing. They require less effort than trading and provide steady returns over time.
-
Build an emergency fund first
-
Start with SIP (not a lump sum)
-
Choose Growth over Dividend Reinvestment
-
Invest directly (if possible) to save on fees
-
Select the right categories instead of chasing individual funds