99% mutual fund investors do not understand these 3 critical points for long term success

Are you investing in equity mutual funds or planning to invest?


While you might have done your research and reading about investing in a mutual fund, but I am sure you still do not have 100% clear idea about what does it mean to invest in a mutual fund. In this article, my attempt is to make you understand what exactly you should be expecting out of your investments in equity mutual funds.

Points to know before investing in equity mutual funds

A lot of investors are approached by advisors and agents who sell equity mutual funds to them in the name of “high returns”. But investors are not informed about the risks associated with it. Because of this most of the investors redeem their investments if markets fall or if the returns are not that great after a year or so and hence lose out on getting the benefits of mutual funds over the long term.

This happens because in investors’ mind a mutual fund is all about “getting high returns”.

So it’s very important to clear all the wrong notions about equity mutual funds and set a clear understanding of them in your mind so that you get the best out of your mutual fund’s investments.

What are Equity Mutual Funds?

This article is all about “Equity Mutual Funds” and not any kind of mutual fund. One of the biggest myths is that

Mutual Funds = Stock Market


There is various kind of mutual funds, ranging from super safe mutual funds (like liquid mutual funds or debt mutual funds) to high risky funds (like mid-cap funds and equity mutual funds). Below is a

Types of various mutual funds in India

3 important points to know before you invest in equity mutual funds

So in this article, I am listing various important points you should know if you are investing in equity mutual funds or planning to do the same.

#1 – You are investing in diversified businesses

Investing in an equity mutual fund is not like putting money in a fixed deposit or real estate. When you invest in an equity mutual fund, it invests your money in a portfolio of companies.

Equity Mutual funds are a way to invest in a number of stocks using one single investment and get it managed by an experienced and well-qualified fund manager.

For example, Birla Sun Life Frontline Equity had 80 stocks in its portfolio as on 30th Dec 2016, as per the money control website. This means that if you are investing in these mutual funds, you are actually investing in 80 companies.

You own 80 businesses

Your returns or loss depends on 80 different company’s performance over time. Think about it.

Below is a partial list of companies in the fund.

mutual fund portfolio sample

Now when you know that you are actually invested in 80 different companies, it’s important to know that returns from your mutual funds actually come from the returns from these companies stocks performance over time, it’s the average of these companies.

Below is a very good video, where it’s explained how business create wealth over the long term in Indian context

#2 – You are investing for long term

No business earns exceptional returns over the short term. Now as you know that you are actually investing in a business when you are investing in equity mutual funds, that too in multiple companies, the great returns will come over the long term.

Some companies will not do great, some of them will do average and some of them will grow exceptionally. And when you do the average, you will get very good returns.

The best part is that the chances of great returns are much higher because you are diversified across various sectors, companies, management, and size.

76 times return in 20 yrs period

Let’s talk about a Franklin India Bluechip Fund which started in 1993. It’s been 23 yrs now since inception.

Over the first 20 yrs (from 1993 to 2014) the fund has given 76 times return. It turns out to be 24% CAGR return and by any standard its mind-boggling returns, especially because it’s for 20 yrs compounded.

franklin India bluechip fund returns

10 lacs invested became 7.6 crores.

If this same 10 lacs was invested in Fixed Deposits, then in 20 yrs it would have grown to 67 lacs.

So its 67 lacs vs 760 lacs.

Sadly, investors don’t wait in mutual funds

Sadly, this 76 times returns do not reflect in most of the investor’s portfolios because investors don’t think long term and think short term. If for some years, the fund does not perform well, they want to move to something else which gives them awesome returns.

Businesses go through various cycles (success and failure, good and bad). So you need to wait for a very long term to see some amazing returns.

If you are right now invested in equity mutual funds, it’s very important to understand that you will not get great returns over the short term (2-5 yrs). Trust your mutual funds and keep investing and over time you will reap the benefits.

There are various mutual funds that are 10+ yrs old and most of them have created big wealth for their dedicated and committed investors.

#3 – You are going to face volatility

“Mutual Funds investments are subject to market risk, please read the offer document carefully before investing”

You will hear this line often in the mutual fund’s advertisements on TV. A lot of first-time investors who do not understand equity investments think that “Market Risk” here means that their money is at risk and they can lose all their money by investing in the stock market or mutual funds.

Mutual Funds are Volatile

That might be true with one particular low-quality stock. But with mutual funds, it’s far from truth. Dozens of quality stocks portfolio which is monitored regularly can bring in some ups and downs in the short term, but your money will not be lost at all.

All you can expect is VOLATILITY with your mutual fund’s investments. Your investment value can go up one day and then down one day, and then again down another day and again down 2nd day and then boom… UP on the third day and then again down and again up and up and up …

mutual funds volatility

I hope you got the point.

But you need to understand a very important thing. Volatility is an inherent part of mutual funds investments as it’s investing in stocks, but it’s more of short term phenomena. You need to sit tight and look at the long term trend and how it moves.

Example of HDFC Top 200 fund

HDFC top 200 is one of the most well-known equity mutual funds which has created great wealth for its investors. Its NAV rose from Rs 10 to Rs 372 in 20 yrs.

It’s a great return over the long term, but the journey was not simple. Its NAV went up first, then came down and then again up and down. See the ups and downs in the below chart for 20 yrs

hdfc top 200 fund returns

Did you notice how tough it would be for someone to not exit and stay invested?

If deep down the fund value is growing. This can be measured by check how the moving average is trending. If you do the average of 2 months NAV and then 3 months and 5 months and keep increasing it, you will see the trend is up and that’s what is the most important take for an investor.

Let’s see how the moving average trend looks like for this same fund over 20 yrs period

hdfc top 200 long term trend

Don’t look at the fund performance and NAV movement every day or month

The volatility in the stock market will keep hitting your emotions and tell you – “Hey, it’s better to sell your funds and be safe”. The biggest problem with mutual funds is that its NAV is available on the daily basis.

What would happen if you were allowed to see your mutual funds NAV and its performance only after a period of 5 yrs? What if an investor who had invested in HDFC top 200 long back in 1996 was able to find out how its fund had performed every 5 yrs?

Below I have plotted the NAV data for the month of Oct for 1996, 2001,2006,2011 and 2016. See how it looks like

hdfc top 200 fund returns in 5 yrs

This tells us that if we stay with our funds (provided they are chosen properly and reviewed from time to time) can help us grow a massive amount of wealth.

So stop looking at your mutual fund’s performance in short terms like 3 months or even a year.

3 more critical information you should know

Mutual Funds investments are highly liquid – If you redeem your mutual funds, you can get back your money in 3-4 business days in case of equity mutual funds. In case of liquid funds its just 1 day, so for short term requirements you can keep some money in liquid funds, but most of your long term goals related investments should be in equity mutual funds

Post-tax returns on mutual funds are better – As of now, the long term capital gains in equity are tax-free, which means that after 1 yr of investments, any profits are not taxable. So this is another advantage of investing in equity funds

You can change your investments any time – Other than tax saving mutual funds, almost all the mutual funds can be switched to other mutual funds if you want. So if your fund does not perform well, you can switch it anytime to another fund

I hope you got some great insights into your equity mutual funds investments and how you should behave as a mutual fund’s investors. It’s very different from investing in Fixed Deposits or PPF or any other kind of investors and your expectations should be very different.
Let me know if you have any more points to discuss or ask in the comments section.

Buying your first car? Here is the data of 451 buyers for you to decide!

No, I am not sharing my personal opinion here in this article.

I am actually telling you about 451 people who have shared their personal data with us in a survey we conducted some time back and we are presenting you the data in this article. That data will help you know how others think and what are their numbers and that way you take a decision for yourself.

buying car india

You mainly have to decide following 3 things when you buy your first car

  • Should I buy a brand new car or a 2nd hand car?
  • How much should I spend on my first car?
  • How much loan should I take?

451 people shared their data about their car ownership

We asked few questions in our car survey like their first car value (when they bought it), their per month income when they bought it, If it was a brand new car or a 2nd hand one, what was the % of loan they took, and some more questions regarding what they feel about the car.

I will share all that data in this article.

Point #1 – Should I buy a brand new car or a 2nd hand car?

Most of the people who buy their first car, generally go for a brand new car, however, some people also prefer to buy a 2nd hand car to start with and then upgrade it later to a new car in the future.

In my own case, I bought the 2nd hand car because I wanted to make sure that I am aware that I make a rough use for all my belongings and its better to first buy a 2nd hand car. Also, I had my budget constraints.

80% of buyers prefer buying a new car

Around 80% of the survey takers, shared that their first car was a brand new car, whereas 20% bought a 2nd hand car as their first car. The average cost for a brand new car was close to 6.78 lacs and in the case of 2nd hand car, it was close to 3.05 lacs.

brand new vs 2nd hand car (Average Value = 6.78 Lacs) (Average Value = 3.05 Lacs)

Pros buying New Car

  • The special feeling of ownership with pride
  • The latest technology, with current features
  • Peace of mind, as you know there are no issues with car

Cons of Buying New Car

  • Much Expensive compared to a used car
  • Much higher depreciation (Try to sell it in 6 months and see the price you get)
  • Takes away a good part of your wealth
  • More pressure on your cash flow if taken on Loan

Pros buying used Car

  • Cheaper and Most of the times can be bought without a loan
  • Low Insurance premium
  • Lower depreciation
  • Better resale value (buy for 3 lacs and sell again in 2-3 yrs)

Cons of buying used Car

  • Old Technology and features
  • Difficult to trace the history and find the legality
  • High maintenance costs
  • Inferior feeling in front of peers who own better cars)

For those who are interested in new vs used car debate can check this detailed article on Team-BHP

For how many years are you planning to own the car?

If you are planning to own a car for just 1-3 yrs, it’s better to go for a used car. However, if you have a view of 5-6 yrs or more, then better go for a new car.

Also if you are tight on your budget and still want to buy a car, you can explore the used cars and after a few years you can upgrade to a better car. However, if have the capacity of buying a new car, you should go for one.

Below is a short video which shows you what all to check if you are planning to buy a used car

Point #2 – How much should I spend on my first car?

Now comes the next important point, which is how much should I spend on the car you are buying. A person earning Rs 10 lacs a year can buy a car costing Rs 5 lacs also and 20 lacs also if they want. However what is the right amount to spend on your car purchase?

This will depend on many factors like

  • Do you want to take a loan or not?
  • If you want to take a loan, how much EMI do you want to pay each month?
  • Is “Car” mere a machine that moves you from point A to point B, or is it much more for you?
  • What is the role of the car in your life?
  • How passionate you are about driving, fancy cars etc

How many times of your income should your car cost?

A good way to look at the potential car value you should buy is the X times of your monthly income. If a person thinks that he should not spend more 6 times his monthly income on the car and if he earns Rs 80,000 per month, then he should buy a car worth not more than 4.8 lacs.

If he feels it should be 10X, then not more than 8 lacs should be spent on the car. However the problem is no one really thinks this way when it comes to decision making, so let’s see what were the actual numbers for various groups!

As per our survey data, those who bought a brand new car, for them this ratio was 9.7 on average (their car value was 9.7 times their monthly income)

And for those who bought a 2nd hand car, it was 6.4

Ratio of car value vs monthly income

Your Salary and what you feel “car” is?

What will be your car value will surely be

We also calculated the same ratio for those whose monthly salary was above 1 lac and below 1 lacs.

Ratio of car price and salary based on salary

If you see the whole data above , you will figure out that if you are buying a brand new car, or if your salary is above 1 lacs per month or if for you a car is much more than a machine which takes you from point A – B, then you ideal money to be spent on your car is anywhere from 9-12 times your current monthly income, else if none of the above is true, then you can go with 5-7 times of your monthly income.

It’s just a benchmark and a rough direction based on what hundreds of people do.

Point #3 – How much loan should I take?

Do you know that as per our survey 75% of the people who bought a 2nd hand car, did not take any loan?

Only 1 out of 4 people took a loan which was on average half the value of the car (to be exact, it was 52%).

However, when it came to those who bought a new car, 69% of them took a car loan and their average loan was 2/3rd value of the car price (rest 1/3 was down payment)

The amount of loan you take will depend on the price of the car, your capacity to pay the downpayment, your views about debt in life. I personally think a person should have the capacity to pay for full car value and only in extreme cases one should go for a car loan as its a depreciating asset anyways.

Burdening yourself with more EMI does not fit my philosophy that too for a car. This is truer if you still don’t own a home or if you have not yet started investments for your long term wealth creation.

Below is a detailed information salary-wise and also thinking wise.

car loan for first car

You will find two kinds of car buyers. One who feels that car is nothing more than a utility which does a job of taking you from point A -> point B. They are not that passionate about cars in general and view the car as just another possession.

Where as on the other hand, there are people who feel CAR is an important part of life. There are various life moments that are linked to your car. Your exotic vacations, long drives and many events in life will not be possible  (most of the times an expensive one).

Who is right or wrong?

None of the groups are wrong or right, its a view and everyone has the freedom to express what they feel about cars.

Coming back to car loan, I feel you should first try to avoid the car loan totally if possible for you, and if not, then you should take less than 50% loan only.

Otherwise, a big chunk of your monthly salary will go into paying your car EMI and your wealth creation might take a hit due to that.

Let us know what you feel about this topic in below comments section.

Basics of Income Tax explained for Beginners [VIDEO Inside]

This is a guest post by one of our readers and our financial planning client Mr. Rahul Udare from Mumbai.

He is CA by profession, and he has created a 45 min excellent video for beginners on the topic of Income Tax. This video below will help anyone understand various things related to income tax and returns and how everything works.

Basics of Income Tax – 45 min Video Contents

Thanks to Rahul Udare

Rahul contacted us a few months back and expressed his interest to do something for investors and we really thank him for that.

Please give your feedback about this video and what else you expect in future from him.

Customers can refuse to pay “Service Charge” at Restaurants – Govt

Govt has clarified that the “service charge” is optional and customers can refuse to pay that if they feel like.

For some years, most of the restaurants and hotels have started charging “Service Charge” along with the other taxes in their bills and us customers due to lack of understanding feel obligated to pay it.

However, the govt has issued a notification today which clearly mentions that if the customer is not satisfied with the experience at the hotel or restaurant, they can choose to not pay it. Below is the video clip of this news

Govt Notification

“A number of complaints from consumers have been received that hotels and restaurants are following the practice of charging ‘service charge’ in the range of 5-20%, in lieu of tips, which a consumer is forced to pay irrespective of the kind of service provided to him,” the ministry said in the notification below

Note that the Hotel Association of India has themselves clarified this point.

Service charge is not mandatory to pay in hotels and restaurants

Why do restaurants charge “Service Charge”?

For those who don’t know this, the service charge was mainly introduced to replace the tips given to the workers (waiters etc), so instead of your giving the tips, the restaurants charge a fixed charge (5% – 20%) and its distribution among the employees.

However, there is no strong proof that most of the restaurant owners actually distribute it among employees. Also irrespective of the service and experience, the customers pay this service charge.

But now after this clarification has come, you can freely tell the restaurant that you will not pay this charge if you didn’t have a good experience at the hotel or restaurant.

An important point to Note

  • Service Charge goes to restaurant kitty
  • Service tax goes to Govt
  • Service Charge can be added to the bill only if its mentioned in the menu
  • Service charge is not mandatory to be paid if you don’t want to pay it

What are your views about this topic and notification?