I am an IT sector employee earning Rs 93,000/month. How should I start investing in mutual funds?
Even as investing in mutual funds has become super easy these days, many individuals are still looking for the right way to start their investment journey. One such reader, G Rakesh, wrote to FE Money that he is earning around Rs 93,000 per month from his job in the IT sector. He wanted to know ways to invest in mutual funds.
Rakesh wrote: I am currently working in the IT industry, earning around Rs 93,000 per month. Please suggest how to invest in Mutual Funds. I have a low to medium-risk profile.
Mayank Bhatnagar, Chief Operating Officer at FinEdge, a financial planning firm, answers the reader’s query:
Congratulations on your decision to invest in Mutual Funds! We hope that your journey to wealth creation is rewarding and fulfilling. The first thing that we would suggest is not to make the common mistake of starting off with “which fund to invest into”. This approach of selecting funds based on short-term past returns leads to losses in the long run.
Instead, we would suggest that you begin your investing journey with an evaluation of your cash flows so that you can set up some healthy targets for your key financial ratios such as savings surplus, reserve surplus and debt income.
Once you have arrived at a comfortable amount that you can save for your future goals every month in a systematic and disciplined way, you should educate yourself on the risks and rewards of mutual fund investing.
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Most investors who fail to create wealth from mutual funds do not do so because they failed to predict the best fund, but because they invested with incorrect expectations. As a result, they end up making greed or fear-driven investing decisions time and again, eroding their wealth with every misstep.
Having done the above, it is now time to map your future goals. These goals could be short-term, like buying a new car or going for a vacation. Or they could be long-term, like your retirement. Either way, you should prioritize your goals and set realistic targets that you can achieve with your current surplus.
The reason why goal setting is important is because it is your goals that should dictate your choice of mutual fund investment, not your risk profile. You have mentioned that you have a low to medium tolerance for risk. However, you should not let this influence your investing decisions, as the opportunity loss could be huge when it comes to long-term goals, due to the loss of compounding.
As an example, let us assume that you decide to save Rs. 10,000 per month for your retirement, over a 30-year duration. A high-risk fund (such as a flexi cap, mid-cap, or small-cap fund) that delivers a 13% CAGR would result in a corpus of around 4.3 Crores. A low to moderate-risk fund (such as a conservative hybrid) that delivers 8% would result in just 1.49 Crores!
Similarly, for your short-term goals, you could invest in arbitrage funds or liquid funds, that deliver more stable but lower returns. This will ensure that short-term market movements do not disrupt your goals.
What will lead to success in the end is your ability to withstand the ups and downs of markets and continue investing with resilience. While correct expectations and goal setting will help you to an extent, you may also want to seek the support of a qualified investing expert to guide you on your journey and help you avoid common pitfalls. Remember, “how you invest” will make much more of a difference than “where you invest” in the end!
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Disclaimer: Views and suggestions mentioned above are those of the respective experts/commentators. They do not reflect the views of financialexpress.com. Please consult your financial advisor before investing