RAGS TO RICHES | Invest Like a Beginner! Part 3
Rags to Riches is a monthly column published for the ArtNowThus Blog and Newsletter. Meant for creative professionals, freelancers, artists - anyone really who hasn’t yet quite figured it out and needs a place to start from scratch. Put together by Ragini with the help of experts, and heavily aided by stories, puns, memes and examples - this is a finance blog you will actually want to read and (hopefully) put to use in your personal finance lives.
Written by Ragini Singh Khushwaha, founder of ArtNowThus and subject matter expert on the arts, media and content, cats, random factlets from around the world and productivity hacks.
With inputs from Sakina and Husein Merchant, Chartered Accountants who attempt to bring out their best selves by combining their professional skills and their love of being around and learning from other creators.
Welcome back to the final part of our Invest Like A Beginner series! If you’re reading this, I’m hopeful that by now you probably know what investing is and are convinced that it does make sense. If you haven’t got to that point, I highly recommend going back and reading part 1 and part 2 of this series, it’ll set you up well for what’s to follow (blog promotion check✅).
Last time I wrote about how I was managing my investments through a professional money manager. And while that system works great for me, some of you may be more inclined to give this a shot yourselves. This article is my attempt to help as much as I can, to get you started with that.
I’m going to set the stage with a story from a long time ago - my 20s!
For anyone who knows me, it’s common knowledge that I am a terrible driver. There was a brief period when I did try to learn to drive, but after a fair amount of generally terrible (and accurate) feedback on my driving, I gave up. Recently though I seriously considered getting back to driving - I mean half the world does it, how hard can it really be? But finally (much to the relief of most people who had ever been in a car with me) I let go of the idea and decided I would stick to professional driving services to help me with what I couldn’t do. That’s pretty much the analogy for the situation of how you can manage your investments - you could either Uber it through and through with a professional (and you don’t need to have lakhs and crores in your bank accounts to do this, you could just start with a few thousands even). Or you could take the time and make a few mistakes, cause a few bumps along the way and learn to do this yourself. In my world both are equally reasonable options, you just need to decide on what route you take based on what works for you!
In this article, I take you with me on my learning journey over the last month as I figure out the route to self-managed investing.
Starting with an easy enough question to answer:
Question 1: What should the break-up of your investments be?
So! How much of your total money should you invest in safe assets like FDs and how much should you put into investments like the stock market, which are slightly riskier but have the potential to yield much higher returns on your money?
Probably Relevant Side Note: We’ve talked about this in our past issues in detail, but essentially there are two types of investments - fixed return investments (like a fixed deposit for example) and investments in the stock market, or what in finance jargon is called equity investments.
If you have the advantage of youth on your side, it could be wise to take a few (carefully optimistic) chances and live a little. For most people below the age of 45, experts suggest a 30-70 split as a good investment break-up. What this means is, you put 30% of your money towards fixed investments and the rest goes into the stock market.
In this 30% if you’re making any investments in an FD, I’d recommend doing longer term investments for about a 3 year tenure if you can. More often interest rates for FDs are better for longer periods than a year or so.
Probably Relevant Side Note: Despite what we say here, or what anyone says ever - that little devil who lies in the details can always poke their head out. So ALWAYS check every detail once again with your bank before setting anything up. Know what you’re getting into, before you get into it.
One other fixed investment asset, a personal favourite that I haven’t mentioned earlier, is the Public Provident Fund (PPF). The PPF is a government scheme for long-term saving that is super, super safe with reliable returns and tax benefits - making them very popular. What do I mean by tax benefits here? Investments made towards your PPF are deducted from your final taxable income for the year. This automatically lowers your annual income tax, because the amount you are being taxed on is lower.
That sounds great - so why don’t billionaires go about putting all their money in PPF investments and avoid the hassle of committing tax fraud? Good question. That’s because like all good things, there is a limit to the amount you can invest in your PPF (currently it stands at 1.5L annually). Despite that, as a legal tax-saving instrument, it’s a pretty sweet deal.
Now the idea with any tax saving instrument is to use it to get your payable tax as close to zero as possible. So my advice would be to find out what your payable tax is currently and at what amount it gets to zero
Probably Relevant Side-Note: If you happen to be a salaried employee, there’s a good chance you are already part of a PPF scheme through work. So check with your employer and see if your PPF is already being deducted before you put this amount in on your own.
If not, you can use this tax calculator to help you figure that out - just fill out the basic details and then play around with the number in your Net Taxable Income cell to see how much you need to be investing in your PPF to get the full benefit of that tax benefit - heh!.
Alright so that’s 30% of your money taken care of, what do we do about the remaining 70%? Here’s where we bring in the big guns - equity investing! Equity investing is where you put your money towards either a mutual fund or individual company stocks - anything where your money buys you a portion of the company or fund you’re investing in, and therefore making you eligible for a share of any profits the company might earn.
When it comes to equity investing you could either be an active or a passive investor. An active investor typically studies the market and picks and chooses stocks to invest in. If you are savvy with the ways of the stock market and know your shit around it, I’d say give it a shot.
But honestly, if you’re reading this blog and identify as a beginner I’d really suggest being more passive with your investment strategy and focusing on long-term mutual funds instead.
Question 2: How do I pick what I’m investing in when it comes to the stock market?
I’ve explained what a mutual fund is in part 2 of this series. But even if ALL you know about mutual funds is that they exist and people put their money in it, it’s enough to take you to the next steps here - namely if you do want to invest your money in a mutual fund how do you decide what fund to put your money in.
I’m not going to go into the technicalities of tracking and reviewing mutual funds - that would be a whole article in itself. But there are a few things you should make sure you have your eye on before you go ahead and buy a mutual fund:
1. Is it a well-known fund?
The first thing you want to do is make sure that you are investing in a fund that’s been around a while and has credibility. It’s the same as parking your money in a reputed bank versus a random entity no one’s ever heard of - it’s obviously much more secure to have your money in something established.
2. How has the fund done so far?
Read up on the fund’s performance over the last decade or so, and what have the yearly returns been for investors so far. All of this is easily Googled. Look out for the annualised average return rate of the fund, that’s a good number to give you an estimation of how the fund has been performing. For the most part, a rate of 10% and higher is usually fairly healthy.
3. Who is the fund manager?
Every mutual fund is managed by a fund manager - again easily Google-able. This is the person managing your money, so it’s good to do some recon and find out about them. Know for yourself that they seem capable of doing the job.
4. What is the Expense Ratio?
Okay so the fund seems solid, the fund manager sounds like a stellar human; there’s only one thing left - what is the fund charging you to manage your money. This particular figure is called an expense ratio. It’s a figure in percentage fairly prominent in the details of any fund and easy enough to spot. If the expense ratio of your fund is between 0.5-0.75% that’s considered good, anything above 1.5% is high. So make sure your expense ratio is in the right bracket when you do invest.
So that’s it, you now have the basics in place to pick a mutual fund.
Or I could do you the biggest favour and give you the ultimate hack for investing in the stock market - index funds!
Index Funds
In the stock market an index is something that tracks the performance of a group of stocks based on specific characteristics, like size of the company, number of shares, etc. An index fund is simply a type of mutual fund that in turn tracks the index and invests in the stocks included within it.
An example of an index fund is the Nifty 50 in India. Apart from having a snazzy internal rhyme scheme, the Nifty 50 tracks the 50 largest companies listed on the National Stock Exchange. If the 50th company gets usurped in size by another company, it will get replaced by that company on the index.
Index funds basically eliminate all the guesswork you need to do. Which is why if you’re at the start of your investing journey, I think they are a great place to begin. I’m not discouraging you from building your own portfolio by picking mutual funds and stocks to invest in.
But I’m also saying that people spend years going to schools and getting degrees to learn this stuff. So maybe before you jump in to invest in funds by yourself, start with a simple index. If you’re passive investing, the best thing you can do is invest for the long term. Plan to park your money for the next 10-15 years so that the market and compound interest can do their magic.
Great, so now I know everything about investing ever. But there is one last question in this series:
Question 3: How do I even begin to invest?
This will be the scariest bit to get started on but when you do, it’s so easy you’ll wonder why you weren’t always doing this!
In order to invest in the stock market you need to set up a dematerialised account (or a Demat account), which is an account that allows you to hold shares of companies and trade them. There are multiple ways to set up a Demat account and begin investing. But the easiest, most 2022 way of doing this is to use an app. Since I hadn’t done my own investments before, I decided to test out an app and see how easy it was. I used Zerodha and their interface was a breeze!
Probably Relevant Side-Note: Zerodha is not a sponsor for this article, but if any of you would like to reach out to them and ask them to be, we wouldn’t fight you hard on that.
For the purpose of this article, I have used their Coin app which is the Zerodha service to buy and sell mutual funds. Zerodha has also designed Zerodha Kite to buy and sell individual company stocks and day-trade amongst other things.
Though I am not sure if you can use Coin without using Kite, since I think the login for both are tied together. But I could be wrong about that. For the time being though, I have both apps on my phone and I feel like quite the finance girl!
Download the app, there are a few questions to answer and documents to provide. And within 48 hours they set you up with a shiny new Demat account all the better for you to invest with.
For this article, your girl’s actually executed her first independent investment - woo!
Here’s how it went:
Step 1. I knew I wanted to invest in an index fund, so I literally Googled “top index funds in India”. Despite many viewings of The Big Short, this did seem to work out well for me. But it is also the step that took the most effort. I had to go through a few funds and assess them. While I did use the criteria I’ve listed above to do this, I also double-checked with a finance friend before I chose my fund.
Most funds had a higher initial investment than I was willing to put in, so it took me a while to find one that seemed solid and was affordable to me. The fund I eventually chose had the slight disadvantage of an exit load, which is a small percentage of your money that the fund retains any time you choose to move your money out of the fund. The exit load in this case was 0.25%, it’s not ideal but it wasn’t significant for the amount I was investing - so I let it be.
Step 2. Once you’ve chosen your fund, the biggest share of the work is done. Now all you have to do is click on either ‘Buy’ or ‘SIP’. Both options require you to put in an initial investment amount, but if you set up an SIP, you can automate a monthly investment amount that keeps going into the fund. If you’re sure of your fund and the potential for the returns it’s yielding, it might make sense to set up an SIP and automate it so you don’t have the headache of doing this yourself monthly.
It is very advisable though to make sure your money is in multiple investments even within the stock market. Diversify. Always diversify.
Step 3. Pay the amount and congratulations, you now own a unit of a fund! It usually takes a day to process, but once it does you can track the progress of your investments through the app itself and make tweaks and changes as it suits you.
And that’s it. Three articles in and you’re all set to invest like a beginner!
I hope this series has been helpful in putting you on your way to feeling capable of managing your money with a lot more clarity and a lot less fear. At the very least I hope it’s given you the courage to put one foot forward and start the journey towards financial freedom and security in the new year. Let’s make 2023 the year to manifest all those rich goals - they’re right there for the taking!
See you next year!
The Big Fine Print:
We’d like to establish that while the principles outlined in this section should pertain to anyone, we’ve put this together with a focus on creative professionals and freelance workers. Also, while we do have Husein and Sakina consulting with us on this column and keeping us straight, we’re not financial advisors. This column is for informational and recreational purposes only and in no way meant to offer advice or recommendations.