Fears of a first time investor

Equity funds are slowly and steadily emerging as an effective vehicle for a lay as well as a sophisticated investor.  It is amazing to see the way more and more investors are including equity funds in their portfolio. However, there are many investors who have been watching from the sidelines and have yet not taken the plunge. There are many fears that pose a dilemma to these investors. While each investor has his own perspective, some of the common fears are:

1. Aren’t equity funds risky?
2. Isn’t the current level of the market too high to invest?
3. Do I have enough money to begin investing?
4. Which fund should I invest in?
5. Who can help me invest in mutual funds?

Let us analyze each one of these and see how a first time investor can conquer these fears and benefit from investing in equity funds and build wealth over time.

1) Aren’t equity funds risky?

A first time investor needs to understand that every investment carries certain degree of risk and the potential to earn is directly linked to the degree of risk taken. For a long-term investor, it is essential to ensure that he earns positive real rate of returns i.e. rate of return minus inflation. Equities, as an asset class, have the potential to achieve this. No doubt, equity markets can be volatile over the short-term and that makes equity funds a risky proposition in the short-term. However, it is also a proven fact that over the long term the stock markets go up and provide better returns compared to other asset classes. (Also read - Learn to invest in equities with 'no capital risk')

The good thing about equity investing is that the “risk’ can be minimized by adopting a proper strategy to invest as well as by building a portfolio of quality equity funds. On the other hand, a haphazard approach to investing as well as selection of funds can put one’s hard earned money to risk.

Therefore, an investment in an equity fund should be made essentially for the long term and not to become rich overnight. It is quite common to see many new investors getting carried away with the euphoria in the stock market and taking extra-ordinary risks.  The most important thing is to understand the consequences of your decisions and do not allow emotions to dictate them.

2) Isn’t the current level too high to invest?

As the stock market continues its upward grind, many investors often wonder whether this is irrational exuberance in the stock market or this rally still has some steam left in it. First and foremost, the current level of the market at any point of time should not deter a long-term investor from making a beginning.  That’s because investing in equity funds is a process and not one time activity. The best way to benefit from equity funds is by investing on a regular basis and to have a long-term view. (Also read - Find out your IQ - Investment Quotient)

3) Do I have enough money to begin investing?

Many investors feel that to invest in equity funds they may require large sums of money. The fact, however, is that one can begin investing in some of the equity funds with even a sum as small as Rs.500. The key, however, is that to make this humble beginning into something meaningful, one need to invest on a regular basis. That’s why; a Systematic Investment Plan (SIP) can be the perfect option for a beginner. SIP helps an investor a timing the market and benefit from “averaging” as well as “compounding”. It is a proven fact that compounding is a powerful tool for a long term investor and can do wonders to one’s savings. (Also read - 10 myths about Systematic Investment Plans)

Once an investor enrolls for SIP, it is important to continue with that for years and even increase the amount as and when he is able to do so. Remember, equity funds are your best bet to build a lump sum to achieve any of your long-term investment objectives like buying a house, to provide for a child’s education and to ensure a comfortable retired life. While you may experience lots of ups and downs during this marathon race, you need to carry on. (Also read - Best mutual funds for your child)

4) Which fund to invest in?

One of the most common ways employed by investors of selecting funds is to invest in top performing funds. Though there are benefits of following the market leaders, there is no guarantee that the past performance will continue in future. While it is not prudent to completely ignore these top-performing funds, it is essential to understand their strength and limitations before investing in them.

While one of the major advantages of investing in mutual funds is the variety of funds that are available to investors, it can be quite a daunting task for a new investor to select the right ones. It is quite common to see many new investors making the mistake of investing in every fund that comes their way. Though the scheme selection should be the final step in the investment process, many investors make this as a first step and end up developing a hodge-podge portfolio. No wonder, their experiences deter many new investors from investing in equity funds. (Also read - Be cautious while investing in MFs)

A new investor should begin with diversified funds. In fact, large cap funds can be an ideal way to start and then gradually other funds like mid-cap, specialty and sectors funds can be included in the portfolio. Investing in existing funds, rather than the New Fund Offerings (NFOs), can be a good idea. Remember, existing funds have a track record and a portfolio to ascertain the quality and the future prospects.

Also, a the temptation of investing in a fund just before it pays the dividend. It is important to understand that dividend payments by the funds are a process of distributing gains to its unit holders and only those who remain in the fund for a considerable period benefit from it in the real sense. When one invests in fund just before the dividend is paid, one receives a part of one’s own capital back in the form of dividend and not a part of the gains of the fund, as is commonly perceived. At the same time, since the dividend percentage and not the quality of portfolio or the composition of it, becomes the main criterion, there are chances of investing in a fund that may not merit an investment otherwise.

5) Who can help me invest in mutual funds?

There are many sources like individual and corporate advisors, banks and portals like www.easymf.com that can help you invest in mutual funds.  To find out a mutual fund advisor in your area, you can visit the website of Association of Mutual funds in India (AMFI) www.amfiindia.com and access information about advisors in your area. However, it is always advisable to do some due diligence before finalizing one.  After all it is a question of entrusting you hard earned money to someone for the long-term.

If you are investor waiting to invest in equity, the sooner you get over these fears, the better it would be. Succumbing to these fears can have a profound and detrimental effect on the growth of your hard earned money.

- Hemant Rustagi

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com

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