We're really excited to announce our newest team member at Mintd - Srikanth Chellaboina
Worried about how to get starting with investing? Take a look at how our community helped Gurnehmat make the right choice
Just like any first-time investor who doesn’t know much about markets and long-term wealth creation, I had a lot of questions that I wanted to be answered before I took the plunge. I was worried if my approach would be right or not, whether I’ll be able to pick up the right asset classes or if I should even be investing when the markets were supposedly “in a bad state”.
I joined the Mintd community sometime around June but anxiety usually got the best of me and I stopped just short of asking my queries a few times. But sometime around the end of July, a fellow member asked about how other people think of exit strategies regarding their investments. I saw my chance there and posted a question about the first step in getting started off with investments.
Within minutes, I received amazing inputs from the community regarding how should I start my investment journey. Here is what I learned:
As a beginner (or at any stage for that matter) you should never narrow the focus just on investments. It's always necessary to take a broader look and create a personal finance checklist. To start off, analyze the risks to your investment and understand how you can cover them. The first step should always be setting up an emergency fund for yourself. It's highly important that you set aside 3-6 months' expenses in an emergency fund (using an FD or high-interest savings account). The second major risk is your life, go ahead and secure that corner with a good term insurance. Before moving ahead, take into account any liability you have (i.e. loans). The third risk is the money you might have to spend on urgent health-related matters like hospitalization so make sure you have a good health insurance and actually understand what the terms are rather than just skimming through it like a formality. Now, if you have life goals then plan for them. Set a timeline if you can, a target that you need to achieve, understand your risk profile, and put this together to work out an investment strategy.
In case you're not sure about your life goals but want to build a habit of investing while keeping your spending habits in check, SIPs are the way to go. The "best" strategy is to be early and consistent. Set aside a fixed amount a month to SIP so that you are not beholden to market moves and don't try to 'time the market' (it's almost impossible).
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Learn the ABCs of Index funds and how they can help you build long-term wealth in a (relatively) safe manner.
What is an index fund?
An index fund is a mutual fund or an exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover.
Can they be better than active funds?
A significant amount of research has been published that shows active funds not only underperform the market, but those that outperform in one period are unlikely to outperform in subsequent periods (i.e. their returns are due to luck). In fact, over the last five years, 90% of Indian large-cap active funds have underperformed the benchmark index. The simple and clear-cut reason for this is that stock picking is an extremely tough way of building wealth and works on the notion that the market is inherently wrong. But evidence suggests that the market is highly, though not perfectly, efficient as available information is digested rapidly and reflected in market prices and hence stock pickers can’t identify underpriced stocks with regularity.
What are some other advantages of index funds?
Keep an eye on tracking error
Tracking error is defined as the annualized standard deviation of the difference in returns between the Index fund and its target index. To simply put it, tracking error basically lets you know how well the fund mimicked its underlying index. Lower tracking error means the fund did a good job of replicating its index and vice versa. Always check for tracking error before investing in an Index fund. Market regulator SEBI introduced a 2% cap on tracking error (TE) for passive funds via a circular earlier this year.
So there you go, you've now learned ABCs of Index Funds. As Index funds track portfolios composed of many stocks, investors benefit from the positive effects of diversification, such as increasing the expected return of the portfolio while minimizing the overall risk. While any individual stock may see its price drop steeply, if it is just a relatively small component of a larger index, it would not be as damaging.
Take a quick look at how asset classes across India and the globe fared.
Mintd Investment Advisers PrivateLimited, (“Mintd”), the owner of the Mintd.in Platform, is a fintech companyproviding digital wealth management platform solutions via mutual funds. Mintd,through its affiliate KIA Financial Services (Mutual Fund Distributor, ARN-104672), offers digital platform to investment in mutual fund portfolios.
Investment in securities marketare subject to market risks, read all the related documents carefully beforeinvesting. Mutual fund investments are subject to market risks, read all schemerelated documents carefully. Mintd Investment Advisers Private Limited (BrandName - mintd.in, MIntd app) makes no warranties or representations, express orimplied, on products and services offered through the platform. It accepts noliability for any damages or losses, however, caused in connection with the useof, or on the reliance of its advisory or related services. Past performance isnot indicative of future returns. Please consider your specific investmentrequirements, risk tolerance, goal, time frame, risk and reward balance and thecost associated with the investment before choosing a fund, or designing aportfolio that suits your needs. Performance and returns of any investmentportfolio can neither be predicted nor guaranteed.