Why You Should Invest Early (And How To Do It)


Recently, I came across this question a young Quora user had, and I was thrilled that he asked it! People, including me, don’t tend to think about investing at the age of 19, but he definitely has the right idea. Long-term investing is an area where even a 2-3 year head start can make a big difference 20-30 years down the line! So kudos to him! My answer also discusses our own Mutual Fund selection strategy here at Goalwise. Here is my full answer on Quora.

Question: I’m 19 years old and I want to start investing in SIPs. Which funds can I look at? I would like to start at Rs. 1000 a month, it’s just so that I reap the benefits of compounding and a few years down the line it can prove useful.

It is great that you are starting investing at this age! I wish I had the foresight to start as early as you. Even a small investment of Rs 1000 invested monthly can become ~1.3 Cr by the time you are 60 @12% CAGR. If you can increase the investment amount by 10% every year as your income increases it can become 4.16 Cr!

Chart

However, you must keep in mind that investing in equities is a long term game. It is not a get-rich-quick formula. Stock markets (and Mutual Funds investing in them) are volatile by nature and it is not uncommon for them to have negative returns every now and then. Sometimes they even crash, losing 40-50% of their value. It has happened in the past, and it will happen in the future. Even after this, stock markets remain the best way to generate inflation-beating returns in the long run. You just need a good deal of patience and conviction in what you are doing.

Mutual Fund Selection

The first thing to understand is that selecting mutual funds is not a one time decision. Funds, their managers and the investing environment keeps changing and one needs to keep tabs on their Mutual Fund selection at least on a yearly basis. So what you really need is a process to identify good mutual funds for yourself.

There are several type of Mutual Funds – those that invest in large caps, mid caps, small caps, some that invest in a mix of all three, some that invest in a particular sector or theme.

Avoid the thematic/sectoral ones at all costs as individual themes and sectors keep going in and out of favour. Go with a diversified/multicap fund (and choose the Growth option) as they have enough flexibility to invest in opportunities across sectors and market caps.

3 Growth

4 Sector

A long track record of good performance is essential – 10 years or more so that the fund has seen, survived and proved itself through ups and downs of different economic conditions. This indicates that these Mutual Funds follow a systematic process for investing and their results are not chance-driven.

5 Young

Don’t go by short term track records of last 1-yr, 3-yr or even 5-years. In investing, these time periods are not long enough to differentiate between skill and luck.  

There are other statistical measures of performance too – like Sharpe Ratio (a measure of returns per unit of risk), Alpha (a measure of a fund’s excess returns over a benchmark like Sensex or Nifty) etc.  The top funds which have the best long term performance records typically also rank well on statistical measures.

Since you are going to invest only Rs 1000 now, you will be able to invest in 2 equity funds as the minimum SIP amount is Rs 500. You can consider the following funds that have a very good long term track-record  and seem to follow a systematic process of investing:

*ICICI Prudential Value Discovery Fund *(10-year returns of 15.4% vs a category avg of 10.6%)

*Franklin India Prima Plus-Growth *(10-year returns of 14.2% vs a category avg of 10.6%)

You can look at the historical returns and the various statistical ratios of all Mutual Funds on websites like https://www.valueresearchonline…. or advisorkhoj.com

Again, a word of caution. No matter how much analysis one does, there is absolutely NO way to predict which mutual fund will give the maximum returns in future. The best you can hope for is to select funds that have a high chance of being better than the average and hopefully being in the top 10 in future. And even this will be enough for you to accumulate wealth over time.

If you want to know more about how I select Mutual Funds for myself and my clients you can read it here : The Best Mutual Funds for You