3 Secret Investment Hacks Every Beginner Must Know

Warrant Buffet once said, “Someone is sitting in shade today because someone planted a tree a long time ago.” From an investment perspective, it means that long-term investments can bring rewards not just for you but also for your family. Often, beginners are unsure of how to start their investment journey because they are unfamiliar with the financial markets. They might not even know that you can start investing in mutual funds with as little as ₹100 per month. The funds are managed by experienced fund managers, which means you don’t need to be familiar with the markets or monitor your investments constantly.

Want to know more about how to get the best out of your investments? Here are 3 hacks to help beginners.

1.    Plan & Invest Regularly

Did you believe you need money to make money? Not with Systematic Investment Plans (SIPs). All it requires is regularly investing over the long term. Long-term investments in mutual funds via the SIP route give good returns due to the power of compounding. Also, rupee cost averaging helps you make the most of your investments if you stay invested for the long term. Regular SIP investments also instil discipline and a good savings habit. So, start as early as you can and plan to increase your investment amount at regular intervals.

2.    Step up Investments Each Year

To maximise your returns from mutual fund SIPs, increase your investment by a certain percentage each year. When you receive a hike in your salary, plan you budget so that you can also raise your investment. Quite obviously, the more money you invest, the more returns you get. This can also help you counter the impact of inflation on your returns. To enjoy all the SIP benefits, increase your investment at a higher percentage than the inflation rate. For instance, if the inflation rate is 7.5%, your step-up percentage should be at least 10%.

3.    Never Keep All Your Eggs in One Basket

A mutual fund automatically diversifies your investment. This is because your funds are invested across multiple equities, debt instruments or a combination of the two. This way, you don’t need to worry about only investing in one instrument. When your portfolio is diversified, the underperformance of one asset is compensated for by the outperformance of other assets. This minimises the impact of market risk on your investments. With a Systematic Investment Plan, you don’t even need to worry about modifying your portfolio based on changes in market conditions. The fund manager takes care of this on your behalf.

Final Words

Beginners might get nervous while starting their journey of investment. Market risks can create certain doubts in your mind. The good news is that different funds have different risk-reward ratios. So, do your homework and choose the right investment instrument based on your risk appetite, financial goals and investment horizon.

Understanding Risks Linked with Debt Mutual Funds

 

The growing popularity of mutual funds in India can be seen in the significant rise in the number of folios being managed by the industry, which stood at 13.56 crore as of July 31, 2022, according to the Association of Mutual Funds in India. Among the different types of mutual funds, debts funds have been attracting Indian investors due to their lower risk, compared to equity or hybrid funds. However, debt mutual funds are still exposed to some market risks, which are important to know to make an informed investment decision. There are 3 types of risks that even the top debt mutual funds could experience.

1.    Credit Rate Risks

The fund in which you invest will lend money to certain companies, banks, and even the government. The risk of the borrower failing to make the required repayments to the fund is called credit risk. Rating agencies, such as Crisil, Care and ICRA, are responsible for rating these borrowers on the basis of their record of repaying their debts. A company that has received an AAA rating from these agencies is considered to have negligible risk of defaulting on payments of interest and the principal amount.

However, private companies are considered to be higher risk, since there have been instances in history when such companies have gone bankrupt and defaulted on paying back. When you invest in debt funds, make sure you analyse the portfolio to understand how the assets will be allocated.

2.    Interest Rate Risks

The interest rate is typically dependent on the economy. If the economy is growing, interest rates paid on investments tend to rise, while if the economy is slowing down, interest rates typically fall. Also, longer maturity funds tend to have higher interest rates than smaller duration ones. The price of bonds decreases when the interest rate goes up and vice-versa. Also, interest rates may vary from one fund to another.

3.    Liquidity Risks

The top mutual funds trade their securities daily in the debt markets, just like shares. The only difference is that debt securities are traded mostly by companies, governments, banks, or other large financial institutions. In such cases, individual investors are unaware of the daily change in prices. The fund manager has to ensure that the securities have enough liquidity so that the fund can move in and out without affecting its value. Changes in economic and market conditions could reduce the liquidity of the debt securities. In such cases, the debt mutual fund will not be able to sell the securities and repay investors. This risk is termed liquidity risk.

Before you invest in the top debt mutual funds, make sure you understand the risks and debt fund returns. Remember that while debt funds are lower risk investment vehicles, risks cannot completely be eliminated in market-linked products.

Calculating Mutual Fund SIP Returns: Here's How

 

An SIP or a systematic investment plan lets you invest money regularly. The power of compounding then helps to grow this fund to a significant corpus over time. SIP is a simple choice, ideal for anyone who is new to the investment world and does not have a high risk appetite. It is perfect for Gen Z or millennials since the procedure can be automated. The money gets deducted from their account at specific intervals. One can begin with ₹500 and further contributions can be made weekly, monthly, quarterly or in a lump sum.  
It is a well-known fact that SIPs are safe, convenient and easy to operate. But have you ever wondered how to calculate mutual fund SIP returns? Here’s a look.

Point-to-Point Method

This is also known as Absolute Return and is a straightforward method. It helps you calculate the returns from the start to the end point of the mutual fund investment. The formula is:

Absolute Return = (Present NAV – Initial NAV) / Initial NAV × 100

This is the preferred method when the holding period is less than 12 months. It has been mandated by the SEBI or Securities and Exchange Board of India. But a drawback here is that it does not consider the investment tenure or the holding time. Yet you can learn about the pace in which the investment is garnering a specific return percentage. There are different mutual fund SIP calculators and tools online that can help you figure out the returns.

Compounded Annual Growth Rate (CAGR)

It helps to calculate lump sum investment over a period of more than 12 months. Say, you had invested ₹1 lakh in a scheme in 2015 with ₹20 as NAV. After 6 years in 2021, the NAV may have reached ₹50. Use the value of investment to calculate CAGR return instead of NAV.

The average growth of investment can be calculated with:
 {[(Present NAV / Initial NAV) ^ (1 / number of years)] −1} × 100

 

The following formula will be applicable if the holding period is in months:

= {[(ending value / beginning value) ^ (12 / number of months)] −1} × 100

You can calculate on an excel sheet using the following formula:
=RRI (Nper, PV, IV)

 

Simple Annualised Return

This method helps to calculate simple returns on your initial investment. You have a clear idea of how much you could have generated if you stayed invested for a year. The formula:

Simple Annualised Return: [(1 + Absolute Rate of Return) ^ (365/number of days)] – 1

This is also known as the effective annual yield. It is actually extrapolating the returns rather than offering a true picture assuming that the investment has grown at a constant rate. Look for a lump sum SIP calculator or talk to a financial expert for better clarity on the returns.

Never start an investment blindly. Learn the risks and expected returns with the help of a Systematic Investment Plan Calculator, know how to calculate mutual fund SIP returns and consult a financial expert for an informed decision.