From Awkward Chats to Financial Insights: Learn How to Invest Wisely

December 06, 2024

Let me confess upfront: I’m terrible at small talk.

Social gatherings are my Achilles' heel, especially when faced with the challenge of creating engaging yet effortless conversations. However, last evening, when I met my cousin sister and her husband, I found myself thrust into the proverbial deep end of small talk. What could I possibly say to make the evening flow smoothly?

As luck would have it, I discovered that my cousin’s husband works in a UAE bank. Aha! Finally, a topic I could tackle: money.

Lately, I’ve become deeply interested in personal finance, particularly in frugality and strategies to save for the future. This newfound interest had nudged me toward exploring mutual funds, a topic I eagerly brought up.

Why Mutual Funds Caught My Attention

For years, I relied on traditional saving options like fixed deposits (FDs) and recurring deposits (RDs). While these tools offer safety, they fail to outpace inflation. Realizing that the value of my hard-earned money would erode over time, I began exploring alternatives that offer better returns.

That’s when mutual funds came into the picture — an investment option that promised a balance of risk and reward.

A Beginner’s Encounter with an Expert

I asked my cousin’s husband if his job involved managing investments like mutual funds. To my delight, he said yes. Taking a deep breath, I shared that I, too, had started investing in mutual funds.

“What factors do you consider when choosing a mutual fund?” he asked.

Despite having researched mutual funds and SIPs (Systematic Investment Plans), I wasn’t prepared for this question. My knowledge, though sufficient for personal decisions, suddenly felt surface-level in front of an expert. Still, I mustered my thoughts and mentioned some key factors like fund size, expense ratios, and withdrawal penalties.

(Yes, the exact terms had slipped my mind!)

Probably sensing a tinge of embarrassment in my tone, he reassured me that understanding the purpose of these factors mattered more than remembering financial jargon — a modest and insightful perspective I appreciated.

Lessons Learned: Knowledge, Modesty, and Practicality

This interaction reminded me of a vital truth: an expert doesn’t flaunt their knowledge. Instead, they share it humbly, making it accessible to others. In fact, modesty often reflects true expertise. Those who lack depth in a subject sometimes rely on sharp, showy remarks to cover their gaps.

Inspired by this conversation and the positive response to my previous post on frugality, I decided to share my personal notes on mutual funds. While these notes might seem dry, they’ve guided my financial decisions and could prove useful to you as well.

6 Key Questions About Investing

What Are Mutual Funds and SIPs?
- Equity Funds: High risk, high reward.
- Debt Funds: Lower risk, lower reward, as they invest in stable instruments.
- Hybrid Funds: A mix of equity and debt, balancing risk and return.
How Can You Start Investing?
- Open a Demat account through platforms like Groww, 5Paisa, or ET Money.
- Decide between:
  - Lump-sum investments (Mutual Funds)
  - Monthly instalments (SIPs)
- Opt for direct funds over regular funds to avoid paying commissions to fund managers.
What Should You Consider Before Investing?
- Total Expense Ratio (TER): Funds with lower TER are more cost-effective.
- Assets Under Management (AUM): A high AUM (₹1,000 crore+) indicates stability.
- Exit Load: Choose funds with low or no penalties for early withdrawal.
Is Long-Term Investment Better?
Yes! Investments thrive on patience. Financial growth is slow, akin to watching paint dry. Those who stay the course often see the most significant rewards.
How Much Should You Invest?
Use the 100-x rule: Subtract your age from 100 to determine the percentage of savings to allocate to investments. Adjust based on your responsibilities and risk appetite.

Example: If you’re 25 years old, subtract 25 from 100 (leaving 75). If you save ₹12,000 monthly, allocate 75% (₹9,000) to investments. At 40, with increased responsibilities, the percentage could drop to 60%.

Note: Adapt this rule to your unique circumstances; it’s only a guideline.
Is It Risky?
Yes, all investments carry risk. However, traditional tools like FDs may fail to beat inflation, reducing your purchasing power over time. Mutual funds, with returns typically above 10%, can help you stay ahead of inflation.

The Bottom Line

Investing isn’t just about growing wealth; it’s about aligning financial decisions with your peace of mind. If risk stresses you out, traditional savings might suit you better. Ultimately, remember this: you are your most valuable asset. Protect your well-being above all else.

Disclaimer

I am not a financial expert, and the information shared here is based on my personal experiences and research. Please consult a qualified financial advisor or do your own research before making any investment decisions.

What about you? Do you prefer playing it safe with your money or taking calculated risks for higher returns? Share your thoughts or questions in the comments below!

Husain Journal