Investing is not easy especially when you are young and just getting started. Lots of choices and varied advice from all well wishers end up creating confusion.
One o f the best mutual funds for young investors would be an Index mutual fund or an ETF. Indexing offers low cost broad coverage of stocks that are less volatile than individual stocks.
So, let’s start with the very basics: what are mutual funds?
Imagine one of your friends is an expert in picking stocks and making money in the market. Impressed by his performance, you and the rest of the friends hand over some money to your friend to invest on your behalf.
Your friend becomes the portfolio manager and gets to decide on what to buy or sell. The fund performance depends on the judgement of the portfolio manager.
This was an example of an actively managed fund. There’s another type of fund – Passive fund.
In a passive fund the fund managers do not get to time the market. In fact, he/she has no intervention on the investment decision. He/She is just a gatekeeper/trustee of making sure that the investment are made as money pours in. No second guesses.
Let’s get to understand a bit more about mutual funds.
What are the types of mutual funds?
Apart from the above distinction of active and passive funds, Mutual funds are broadly divided into the following categories:
There are also sector based funds like Pharma, IT, Banks, etc.
What factors to consider before selecting mutual fund(s)?
It is easy to fall prey to herd mentality. Advertisement, Friends or Celebrity endorsements can easily sway our investment decisions.
It is important to think for oneself and arrive at best choice suited to our financial goals.
The factors I consider before selecting a fund are:
Cost: actively managed funds are costly as compared with the passive ones. Costs eat away a lot of your return. Even a .05% difference in cost can turn out to be a huge amount in the long run.
Active vs Passive: star fund managers come and go. To be successful in beating the market returns, an active fund manager has to be right more often than wrong. Apart from being right, there is a lot of cost in the name of fees that are deducted from the fun returns. I personally prefer taking charge of my money and so, I’ve stopped looking at active funds that tend to come and go.
Broad based vs Sector specific : this is a no brainer. When the objective is to grow wealth over the long term, the choice is to be with a broad based index fund. It is difficult to track or predict how sector based funds will perform.
What type of mutual fund to invest in?
Pick a broad based in Index ETF or Mutual Fund – one Equity and another Bond. Use rule of 110 to divide amount between Equity and Fixed Income.
Rule of 110 is deducting your age from 110 to arrive at %age for Equity investment. Rest of the %age from 110 is for Fixed Income.
What is the best time to invest in mutual fund?
As JC Collins put it, the best time to invest was yesterday. If you missed it, you should start today. Trying to time the market or waiting for a stock market correction is futile and does not make much difference in the long run.
Most young investors today are yearning for FIRE so they can live a rich, meaningful life and get to pursue their dreams.
Being financially independent is a key towards pursuing a rich and fulfilled life. You should make your money work as hard as you by putting it in good investments.
Good investments need not be complicated at all. It does not involve algorithm or complex formulas. Just plain simple concepts to understand and follow – no turning left, no turning right, just moving forward!
If you want to learn more from veterans in this field on how to manage & grow your money, i’d recommend you to amazon’s page here.
Have you started investing already? How has your journey and lessons been so far?
Also, if you know of anyone who might benefit for this article – share.