According to one school of thought, marriage is one of the three key events of one’s life, the other two being birth and death. So, amount other things, it will change how you invest. The right investments can, if nothing else, take care of the quality of your material life.
Marriage is when most couples begin the longest stage of their lives. Consequently, you must keep an eye on the bigger picture when saving and investing because the value of what you save today will keep decreasing, thanks to inflation. It’s a race you have to win. After all, going through your wedding album at a ripe old age shouldn’t mean being reminded of financially carefree days that have passed.
Historically, the only financial instrument that has consistently allowed people to stay ahead of inflation is equity. The problem is that young investors are as unfamiliar with it as they are with marriage. Even if someone decides to invest in equity he has to figure what stocks to buy, and when, especially in a volatile market like now. So, play it safe, as young couples are prone to falling into the tax-saving, low-return investment trap.
The Mutual fund route.
Mutual funds (MF) are the best way to start investing in equity markets. A professional fund manager would track the markets and make informed decisions on what to buy and sell, while you sit up home and begin your new life. But, which fund to buy is as confusing as the stock buying decision. What you need is a simple product that gives exposure to equity instruments without overexposing you to risk. You can do this by investing in the index, which will expose you to the blue chips.
Why invest in an index.
Look at the evidence on the progress of the BSE Sensex, Data shows that the Sensex is a zero-risk investment if you hold it for a period of at least 12 years. So, not only are you likely to be hedged against a fall, you would be almost assured of a gain. Second, the Sensex has beaten inflation. Over 20 years, it has given an average return of 17 per cent, year-on-year. Third, in the last five years, the Sensex has beaten returns from any other financial savings instrument, except some stocks and property.
This is what index investing can do for you, and exchange-traded funds(ETFs) are the best way to get this gain.
What are ETFs?
These are funds that are listed and traded on stock exchange like a stock. You can buy and sell units at real-time prices in the market. ETFs are passively-managed funds, that’s, there is low interference from the fund manager. These are suitable for a newly married, first-time investors. Here, the funds are invested in the stocks that constitute an index( like the sensex or nifty) and in the same proportion as the stocks are represented in the index. It will track the performance of a benchmark index.
Why ETFs?
An index fund also tracks an index, but ETFs are more cost effective and also give an investor a diversified stock portfolio at low cost. These are liquid and widely tracked. They are also researched and risk associated with them is also less.
As ETFs are passively managed, their management cost is low. The other cost to the investor is at the time of buying the units in an index fund entry load is in the range of 1-1.25%. To buy an ETF, you pay only the brokerage to the broker usually less than 1% and often as low as 0.25%. You are also liable to pay security transaction tax (STT) on trades done on the stock exchange. Unlike an MF where you buy or redeem at the closing net asset value(NAV) of a day, with an ETF you have the flexibility to enter and exit at real-time prices of the stock exchange.
The other advantage is the extent of information dissemination that an ETF structure permits. Prices of ETF units are continuously available during trading hours. The stocks in the portfolio of an ETF that track an index and weight age of such stocks in the portfolio or public information. Moreover, since the ETF as well as the stocks included in its portfolio or listed entities, they have to comply with disclosure requirements of the stock exchanges. All the information that you require to make and informed investment decision is readily available.
How to buy?
To buy an ETF, you need to having trading and depository account as ETFs are brought through a stock broker. Contact a broker who deals in ETFs.
What else?
ETFs are the best way for a new investor to be introduced to equity investing. The Nifty, BeEs is an ETF that tracks the Nifty. ICICI Prudential Spice tracks the BSE Sensex. As comfort with the asset class increases, you can explore more of the markets using ETFs. If your risk and investment horizon are conducive, you can include ETFS such as Junior BeEs, which give some exposure to mid-caps, and Banking BeSe, which give a sectoral element to the portfolio. Gold ETFs, which were launched in Feb2007, are an effective way to hedge and re balance the portfolio, especially in times of uncertainty in the financial market.
As you become more familiar, you can use ETFs to gain from intra-day market movements since ETF units can be traded through the day at real-time prices. However, you need to keep the transaction and STT in mind while doing this, Like all they are held for the long term instead of using them to make short-term moves in the market.
An actively-managed fund is chosen, usually, based on its past performance. But top performers change every year. So, you could lose by being in the wrong fund at the wrong time. The way out is to have exposure to indices that mirror market movement. And, this is what ETFs do.
As your marriage and your stock market know-how progresses, you can begin to build complete portfolios with ETFs market and assets classes.
Once you become an ETF expert, you can move on to other way of buying equity. Keep reading our fund picks to know which funds are worthy of your money. This, perhaps, is what they meant when they wished you a “happy and prosperous” married life.
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