Lets say you have been following the golden principle of saving before spending and now you are generating a nice surplus. Well done. Half job done. Now comes the question of where to invest this surplus so that it builds into a nice nest in future and you can retire and enjoy that cottage in the mountains.
See investment has two primary goals 1) protection of capital invested and 2) beating the inflation. This essentially means that where ever you invest your real returns should be positive and not too much risk is involved in the same. F.Ds are safe but they lose money every year as the they have negative real returns ( 10% inflation and 8 percent F.D rates).
That leaves us with three options- Gold, real estate and stock market. Gold is a perfect investing instrument for the day after tomorrow. So we are left with stocks and real estate. Stocks can be very volatile and you have to know your stuff. And until this year unless you had lump of cash you cannot possibly invest in real estate. But now SEBI has allowed REITs or Real estate investment trust so soon you will be able to invest through this instrument.
So that brings us to investing in stocks. So you can either invest in the stock markets by directly buying stocks or buying through mutual funds. If you have time at hand and you understand stocks then may be you can buy directly. A right stock can beat the market big time but you can lose money quite quickly too. But majority of us who don’t understand the stock markets and don’t have time to track the market investing through mutual funds is a much safer bet. And over long period of time ( 10 year plus) its not unrealistic to expect 12% returns from mutual funds. At-least that is what I have been made to believe.
There are many mutual funds so again you to decide where you want to invest your money. Some mutual funds are rated some are not. Some come with New Fund Offer-NFO and some are around for donkeys year. You also have to choose between actively managed or Index funds. Everyone has their own preferences. There is a lot of data in the US market to say that none of the fund managers have ever beaten the index so you re better off buying a index fund. And secondly Index funds have lower expense ratios which means that they don’t charge too much fee ( GS Index fund will cost 0.5% every year where as FT India blue chip can cost as high as 1.6%).In India too one case save more than 1% every by investing in index funds compared to investing in a actively managed fund. However since Index funds don’t have a long track record in India its hard to say how they will perform over a long period of time. Some people believe that Indian markets are not deep and perfect and smart fund managers will be able to do stock picking and beat the index consistently every year. Some guys funds like HDFC top 200, FT India Blue chip and IDFC premier equity have done that. But who knows what tomorrow brings.
One can read more about advantages of investing in Index funds at http://articles.economictimes.indiatimes.com/2013-04-29/news/38904782_1_expense-ratio-index-funds-active-funds
My advise is to do a bit of research on the internet on sites like valueresearchonline.com, moneycontrol.com and livemint.com and identify where you want to put your money. Mint50 mutual fund list is also a good list to start with. Another important decision is whether you should buy it through systematic investment plan(SIP) or directly. Both has its advantages and disadvantages. If you believe you have the necessary discipline both emotional and financial and you can time the market then go for buying lump sum a few times during the year . But if you cannot then SIP gets the job done. One of the advantages of SIP is that it puts distance between you and the act of buying on impulse and intuition. And it adds to the discipline of buying regularly. So you save more and consistently.
I have one advise to offer irrespective of which ever you way you buy into mutual funds. Buy Mutual funds from the Mutual fund provider ( HDFC, Franklin etc) and not through a broker. This is called buying a direct plan. For most of the fund houses you can do this online. In the long term buying directly is cheaper compared to buying it through a broker. All mutual funds are now mandated to have a direct plan. You save on the money that ICICI direct or any other broker charges every time you buy ( it can be as high as Rs 30 per transaction). Also direct plans tend to be cheaper then the regular plans which are sold through brokers. Their expense ratios are less so over a long period of time you save money by going direct. You can read more here http://www.moneycontrol.com/investor-education/classroom/are-direct-mutual-fund-plansbetter-option-1032685.html.
So in summary if you want to invest for future then first invest some time in the same . Do some readings.Identify the right mutual funds or stocks .Once you know what you want to buy then invest directly. Invest regularly and for long term. 10-15 year is long term and then hope that you get 12% or more annualised return tax free. Don’t worry too much about where markets will go to. If our economy doesn’t grow and if there are global problems like war or disease then stock market will be the least of your worries.
So sit back and enjoy the show.
Next: PPF account and why each one of us should have it.