Notes for a
New Investor
Very often through various social media forums or by email,
comes a question – “I want to start my investment which is a good fund for SIP.
“
Before I start finding the faults in the question itself let me point out how the people on the forum reply.
One says go to your bank and take the help of the bank manager.
Another says go to value research select the best performing funds from the start investing.
Yet another says take the help of a professional advisor distributor.
Now let us examine what was wrong with the original question itself.
Firstly the investor is not sure why he wants to invest.
Secondly the investor is not sure why he wants to invest in mutual funds.
Thirdly he is also not sure if SIP is some type of a fund instead of the method of investment.
The most important mistake in this case is that the investor does not have a plan why he wants to invest and what are his short or long term goals. This in plain language means that when would he like to redeem or sell his funds.
When a new investor wants to approach the world of investment through Mutual Funds more often than not he is completely unaware of the various types of mutual funds.
He does not know anything about large cap midcap and small cap or night-cap.
He does not know how much to invest and whether to invest at one go or distributed over a period of time.
If he starts going by the performance of the funds in the past one two or three years he may soon land himself in for unpleasant surprises.
It is very important to understand that the best performing fund may not be the best fund because we are not aware as to how much risk or AMD you risk the fund manager may have taken in order to deliver the return.
The same risk which he has worked for him for one year may not necessarily work in the next year.
Advice for a new investor:
WHY: Before starting investment, please understand yourself and your money. Try to ask the question to yourself first. Why I am investing this money into mutual funds. Is it because everybody is saying or is it because the advertisements on the TV informing me to do so. Or have I discovered the fact that in the long term it is the equity class which normally performs best.
Before I start finding the faults in the question itself let me point out how the people on the forum reply.
One says go to your bank and take the help of the bank manager.
Another says go to value research select the best performing funds from the start investing.
Yet another says take the help of a professional advisor distributor.
Now let us examine what was wrong with the original question itself.
Firstly the investor is not sure why he wants to invest.
Secondly the investor is not sure why he wants to invest in mutual funds.
Thirdly he is also not sure if SIP is some type of a fund instead of the method of investment.
The most important mistake in this case is that the investor does not have a plan why he wants to invest and what are his short or long term goals. This in plain language means that when would he like to redeem or sell his funds.
When a new investor wants to approach the world of investment through Mutual Funds more often than not he is completely unaware of the various types of mutual funds.
He does not know anything about large cap midcap and small cap or night-cap.
He does not know how much to invest and whether to invest at one go or distributed over a period of time.
If he starts going by the performance of the funds in the past one two or three years he may soon land himself in for unpleasant surprises.
It is very important to understand that the best performing fund may not be the best fund because we are not aware as to how much risk or AMD you risk the fund manager may have taken in order to deliver the return.
The same risk which he has worked for him for one year may not necessarily work in the next year.
Advice for a new investor:
WHY: Before starting investment, please understand yourself and your money. Try to ask the question to yourself first. Why I am investing this money into mutual funds. Is it because everybody is saying or is it because the advertisements on the TV informing me to do so. Or have I discovered the fact that in the long term it is the equity class which normally performs best.
WHEN: before taking a step forward into investing your money in mutual fund ask the question when will I sell this fund. If the answer comes within one year within 3 years or even within 5 years then review your decision because you may be getting Better Avenue somewhere else to invest.
In my opinion you must invest that money into equity or equity Mutual Funds which you will -as good as never ever sell. Mutual Funds are designed so that the fund manager can take care of the market conditions and you do not have to worry. So unless you need the money really bad and as a matter of urgency you should try and never sell equity mutual funds.
The only exception to this is when you are fund is performing badly which we will discuss in another article.
WHO: Who meaning whose help will you take in your investment. Will it be a social media forum, Facebook or Whatsapp group OR are the tips from a magazine or the relationship manager at the bank.
Or are you going to go the way on your own by opting for the direct option.
For the reasons that I mentioned in the beginning of the article it is virtually impossible to conceive that a fresh investor will have much idea about the market capitalizations, fund managers and the funds themselves.
Hence it is very much required that a young and new investor takes the professional help for hand holding.
Do not be worried what your advisor is earning you should be interested in seeing that how much are you benefiting.
Sadly , we do not believe in paid professional service. We do not believe that to keep the economy moving we have to make sure that we pay for the resources that we use.
As a result even after quite a few years of investment people barely have few lacs in their portfolios.
It has also come to my attention that when people started investing on their own steam they have been quick to sell in times of market fluctuations.
It is the duty of a financial advisor or distributor to guide your investment philosophy and deter or encourage you to invest consistently.
The social networks and the social media should be used to confirm the action of the distributor and what he is asking you to buy is actually worth it.
But to think that you will have a good portfolio built up worth crores starting on your own is a little difficult and risky, but not impossible.
One heavily guarded secret that the AMCs would like to keep is the interaction that they have with distributors.
Most of the high performing distributors are taken into different locations both in India and abroad for two or three days and they are heavily grilled with the actions and information about what the AMC is are doing and plan to do.
Now whether this is ethical or unethical is a different matter but just like you attend the company's seminars where the company informs you about its future actions and then you take your career decisions based on that, it is same with the AMCs.
People treat me as a Financial Advisor whereas I am not; I
am just an investor like yourself. At best I could call myself a teacher who
just imparts what he has learnt. Yes I did learn a lot and I learnt from the best
in the industry and I paid for getting that knowledge- which I aim to pass on
to you- for Free.
I can help you start your journey but soon enough you should
find yourself, a finance professional. A professional who can do the running
around for you, advise you of pitfalls, who makes sure that your investments
continue even when you are on board. He will make sure that your family
understands what you have started and why it is important that it should be
carried through. You can always consult me or other knowledgeable colleagues on
the Finworld groups if what you are being made to do by your distributor /advisor
is correct.
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