Nitish Parkar

In a world brimming with investment choices, deciding where to put your money can be daunting. I got a few such queries recently, inspiring this blog post. My understanding comes from reading, watching, and listening to resources on personal finance, mainly from Freefincal, Capitalmind, and Primeinvestor, as well as through my personal experiences and stumbles. The goal here is to help two types of beginners: Those who have no idea how to get started and those making suboptimal investments (such as investing in regular mutual funds through neighborhood agents who themselves do not know much about investing¹). Such individuals can begin with the approach outlined in this blog post and can continue learning about investing alongside. If DIY is not their thing, they can hire someone once their corpus grows large enough.

The Goal

The first step of investing is knowing what you are investing for - the goal. How far ahead the goal is in the future will determine your asset allocation. You can have multiple goals, such as big holidays, major purchases, etc. If you can’t think of any, Retirement/Financial Independence(FI)/Wealth Generation becomes your default goal. The rest of this post will assume that you are investing for FI.

Asset allocation

Once you have determined your goals, the next step is to decide what asset classes you want to invest in and what percentage for each class. This two-part article from Capitalmind does an excellent job of explaining it in detail. If you would rather not go into the details right now, here is a simpler version: There are two main asset classes - Equity and Debt. Equity provides capital growth but is risky, Debt offers capital preservation and is more stable than Equity. You would typically use a mix of both in your portfolio.

The easiest way to determine your asset allocation ratio is to subtract your age from 100; the resulting number becomes your Equity percentage. So, if you are 30 years old, you can allocate 70% (100 - 30 = 70) of your investment amount to Equity and the rest to Debt. For example, if you plan to invest ₹10,000 per month, you would put ₹7,000 in Equity and ₹3,000 in Debt.

Rebalancing

Since different instruments grow at a different rate, sooner or later your asset allocation will diverge from the desired. So you will have to take some money out from one asset class that has grown faster and put it into the other one that has grown slower. This is called rebalancing. This will prevent your money from getting concentrated into riskier assets.

Typically, you would rebalance once a year, this is called rebalance frequency. Let’s assume an asset allocation of 70:30 between Equity and Debt. If, at the end of the first year, you had ₹1.4L in Equity and ₹40K in Debt, you would have ₹1.8L total. According to your asset allocation, it should have been ₹1.26L in Equity and ₹54K in Debt. Therefore, you would need to transfer ₹14K from Equity to Debt.

Mutual funds

The simplest way to get started with both Equity and Debt investments is through passive mutual funds. For Equity, you could pick a fund that follows the Nifty 50 index and for Debt, you could use a 10Y constant maturity fund². The assumption here is your goal is 10+ years away.

How to select these? Go to https://freefincal.com/, search for ‘plumbline’, and open the latest ‘Handpicked List of Mutual Funds’. For Equity, pick an index fund from ‘Index funds (large cap)’ and for Debt pick a constant maturity fund from ‘Ten-year Gilt’. Personally, I am using ‘UTI Nifty Index Fund - Direct’ and ‘ICICI Prudential Constant Maturity Gilt Fund - Direct’.

For equity index funds, it is very important that the tracking error is low. So don’t just look at the expense ratio while selecting funds. Also, when you are investing yourself, always invest in Direct mutual funds. ‘Regular’ versions of mutual funds have higher expense ratios to pay the middlemen, and in turn, give lesser returns than Direct. How much lesser returns? For a SIP of ₹5000 each month over 20 years, you may get ₹5L less in regular funds ³.

This article compares both options in detail if you are interested in reading more. For a comparison of direct vs regular fund expense ratios and what goes into expense ratios, see this.

Quick note on alternatives

For the Debt part, you could use fixed return instruments like Provident Funds and Fixed Deposits too. Most of the salaried folks will have some investment in EPF, which you can consider as part of your debt portfolio. Those without access to EPF(and even those with EPF) can use PPF. Rebalance would be difficult with these as you can’t easily take the money out. So you can use a combination of PF and debt funds. I personally use PPF + a Constant Maturity Gilt fund + a Liquid fund.

What about stocks? I wouldn’t recommend investing directly into stocks until you have done your research and are willing to regularly spend time on maintaining your stock portfolio. If you are tempted to invest in stocks, you can maintain a small stock portfolio (< 5% of your entire portfolio) to scratch the itch. If you do invest in stocks, ensure that your stock portfolio is at least beating the Nifty 50 Index.

How to invest?

Use Kuvera. It’s easy to use and gets the job done. If you are investing in stocks too you could use Zerodha’s Coin. There are many other sites like these two and you may use those, but do so after doing your research. I have used many, and have spent some time cleaning up the mess they created. Then there is MF Utilities created by mutual funds, and each mutual fund house has its own site and app. These are far from user friendly though.

Kuvera also lets you add assets other than mutual funds to give you a consolidated overview of your investments. I started much before Kuvera became mainstream, so I directly use mutual fund websites and use a Google sheet for tracking my portfolio. Also, automate your investsments through SIPs/STPs and stick to websites for setting these up. You don’t need to look at your portfolio daily. Not using apps helps you stay sane and avoid unnecessary tinkering when there is a dip in your portfolio value.

Where to go from here

Now you know enough to start investing. This passive portfolio will serve you well for a long time⁴. Parallelly you could learn more about personal finance and investing, and get confident about your investment decisions. Or find a Fee-only Financial Planner to do it for you.

Here are some of the quality resources that I found useful in my journey:

Freefincal - Website | YouTube

Freefincal has a lot of excellent free articles and videos on various subjects, especially index investing. It’s free ebook on debt mutual funds helped me a lot in understanding debt funds. Plus, they publish a list of handpicked mutual funds every quarter, which is a great help for DIY investors.

Primeivestor - Website

This is a paid service but the frequency, quality, and usefulness of their articles is top-notch. They review the mutual fund universe every quarter and select the best ones for you. They also have several goal/situation-based mutual fund portfolios wherein mutual funds and their weights are pre-decided by them, you just have to follow the portfolio recommendations. They recently added a forum where you can ask your questions and other people/folks from Primeinvestor can chime in. Overall, their Essentials plan is worth the money if you want to read more about investing or want to DIY beyond passive funds.

Capitalmind - Website | Podcast

This is again a paid service, and quite expensive at that. The main attraction is the Slack community and the Slack archives. You would find a lot of knowledgeable people on it discussing a wide range of topics. Although the community recently has somewhat lost its sheen because of the departure of several key members, it still has a lot of interesting discussions and they still have Deepak Shenoy. They provide model portfolios and strategies too, but that needs a fair bit of involvement on your part. They also have a great podcast and a good deal of articles and videos across a range of topics. I feel you would be able to make the most of the subscription once you have learnt the basics from elsewhere.

Zerodha Varsity - Website

They are the pioneers of stock market and financial education. Have a lot of in-depth and free articles on the stock market. They are trying to create videos too. And all this is neatly arranged into modules. You gotta appreciate how much quality content is available for free.

This is not a comprehensive list, these are the sites I have used personally and have found trustworthy. There would be several other resources that are equally good, but for every good resource, there are ten others selling snake oil. YouTube channels such as CA Rachana Phadke Ranade’s are good for learning concepts, but don’t go on making random bets based on their advice.

In addition to these, I would recommend reading The Psychology of Money by Morgan Housel. A lot of investing decisions that you and those around you will make will be driven by your unique worldview. This book will help you understand some of your biases and will make you more empathetic about the strange behavior of others when it comes to money.

Parting thoughts

The world of personal finance is filled with complexities, but you don’t need most of the fluff. Keep it simple and manageable. At a young age, you are better off paying attention to your career than your investments. Earning and investing more will take you to your goals faster than optimizing your investments⁵. If you find yourself spending more time with your investments than with your friends, perhaps this gem from Tim O’Reilly will put things in perspective - “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.”

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