Start Investing For Best Highest Returns In The Long Term
When I started my investing journey, I was thrilled with the idea of multi-bagger returns in the stock market.
₹10000 invested in Infosys in 1993 would have made you a Crorepati. Instead of buying a Royal Enfield, if you had purchased its stock in early 2000, you would have become a Crore-Pati by 2015 and likewise many said stories of multi-bagger returns.
Initial Failure in Investing
Hence, I started my luck in the world of the stock market with a dream of generating multi-bagger returns at that time I had no clue about how the stock market works and how to pick the right stock I just wanted one thing multi-bagger returns.
I thought Infosys has already generated huge returns, so let me put my money in small companies that can generate huge returns. But unfortunately, I ended up investing in the wrong stocks as result rather than creating wealth I ended up destroying my wealth hence I started my journey in the stock market with a failure.
Thankfully I realized my mistake and then I learned every aspect of investment to ensure that I do not repeat such mistakes.
Now, why am I telling you this story? The reason is simple there are many young investors who have recently started their stock market journey and everyone wants to generate multi-bagger returns.
But let’s be honest picking multi-bagger stock is not a cakewalk it is very easy to look at hindsight and say that I should have invested in TCS or HDFC bank or Titan and so on. However, the question is where to invest now and that’s where many people end up picking the wrong stocks.
Investing in Mutual Funds Vs Stocks
The title of this article says the best way to invest for long-term wealth creation. Now, what is the best way? Stocks or mutual funds or a mix of both. If you have been following my Blogs for some time now you would know that I diversified my money and I invest in a mix of stocks and mutual funds.
Within the mutual funds, I invest in both passive and active funds. It is not that I created this portfolio of stocks and mutual funds overnight.
I did thorough research on every aspect of money management and I realized that the stock market is not that easy. You need to spend a lot of time doing the research before you pick the right stock and no matter how much you learn theoretically, at the end of the day you need experience in the stock market that builds over a period of time.
Where to begin?
So, I started with the majority of my investment in mutual funds the reason was simple I did not have enough time for research because I had a job and I was in my learning phase moreover I wanted to reduce my risk with diversification.
A mutual fund provides the right kind of diversification by investing across various categories of stocks I just love the idea of investing systematically in the form of SIP.
For a salaried employee starting SIP in Mutual Fund and investing every month without worrying too much about the market movement, with absolutely amazing returns is the best possible option one should look for.
Investors who do not have the right knowledge to pick stocks or do not have the time to research. That’s where Mutual funds are one of the easiest and hassle-free ways to invest for long-term wealth creation.
I know that the stock market is more fascinating as you can see stocks are generating 10-15 or maybe 20 returns in a day but that is not the case with mutual funds.
However, with high returns, you also have a high-risk probability. The same stock can fall 10 or 20%. Please note that I’m not saying that you should not invest in stocks. My point is to balance across stocks and mutual funds and if you are a new investor then it is always better to have a higher allocation in mutual funds.
The reason is that today when Sensex is at 60K, everything is seemed rosy. But when corrections will happen, many investors would not like to see their portfolio in red. Some of them might even panic and end up selling their investment but trust me if you want to create the wealth you need to invest in for the long term.
One problem with the stock market is that we generally end up looking at our stock portfolio too often. I also did the same, I used to check every hour. I’m sure there are many people who would agree with me and if you do, please comment below, how frequently you look at your stock portfolio.
When you look at your portfolio frequently and fall in the stock that you own. Creates panic if the stock is not performing well for a few months, you would probably end up selling it.
Mutual Fund Investing
However, that is not the case with mutual funds you don’t look at your mutual fund NAV daily now when I did more research I got to know about the different types of mutual funds. The biggest learning was the difference between active versus the passive style of investment I hope that you already understand the difference between active versus passive mutual funds.
I have already written an article in the past explaining the difference between both. So, in simple terms passive mutual funds means that the fund manager does not play an active role in fund selection. For example, many of these funds simply replicate an index like Sensex or Nifty with the goal to generate a similar return as that of the index.
Whereas in active mutual funds the fund manager actively buys and sells stocks with the goal to beat the index or in other words beat the benchmark passive funds usually have a very low expense ratio that is fund house fee. On the other hand, active funds charge a higher expense ratio now it has been proven in developed countries like the USA that in the long term active funds are finding it very difficult to beat the index and deliver better returns.
Hence it is important to understand and invest in passive funds too so some portion of your portfolio at least matches the return of the index and helps you do not miss out on India’s growth story.
The problem with the active funds is that the majority of people end up investing in active funds just based on the past returns and that too for the short term like over the last one to three years. For example, if a fund has given the highest return in let’s say last three years then there are high chances that you would end up investing in that fund.
However, there is no guarantee that the fund you have chosen based on past returns would continue to generate high returns in the future and there are chances that the fund may even end up generating a lower than average return.
I am sure many of you would have faced this issue where you would have invested in an active fund and that fund did not perform well or the high performing fund manager left and then you get confused in terms of should you continue investing in that fund or should you exit and switch to another fund.
That’s where passive funds come in and they are the super easy and hassle-free way to invest money without worrying about your fund manager changing or trying to beat the benchmark simply invest systematically and let your money grow.
Just to give you an idea if you invest let’s say rupees 25 000 per month for the next 20 years and are able to earn a modest 12% return then you would end up with a corpus of 2.5 crore Rupees. This example is just to give you the idea of the power of compounding for long-term investment.
Now within passive funds, there is two types of the options index fund and exchange-traded funds I’ve already created a blog on the difference between index funds and ETF’s.
ETFs are just like your index fund but the difference is that they can also be traded like stocks. So, you can buy and sell ETFs just like stocks on the exchange so the concept of the index fund and ETF is very simple you replicate the index in the same exact manner.
For example, if reliance says has 10% weightage in the index as per the free-float market cap, then the index fund manager would simply invest ₹10 out of every ₹100 in reliance.
However, there is another form of index or ETFs based on equal weight index I’m sure this would be a relatively newer concept for a lot of people.
What is an equal weightage index and how is it different from a regular market-weighted index let’s try to understand this, there’s no doubt that index funds are one of the simplest ways to invest money and create wealth?
However, there is one issue with regular index funds. A regular index fund would simply invest your money in the same exact proportion as per the weightage of the stocks in the index due to this there is a high concentration of few stocks in the index.
For example, Reliance has around 10% weightage in nifty 50. Hence out of rupees 100 your rupees 10 would be invested in reliance now that’s a high concentration in a single stock in fact the top 10 stocks in nifty 50 have around 58 weights in the index today hence out of rupees 100 around 58 rupees would be invested in those top 10 stocks and the remaining rupees 42 would be invested in your remaining 40 stocks that creates concentration risk.
This means, if some of these top 10 stocks, don’t do well. Your investment will also be at risk.
Likewise, if you look at the sector-wise concentration financial services have almost 37% weightage in the regular nifty 50 index that’s again a high weightage.
That’s where you have the equal weightage index fund come into the picture. An investment in top 50 companies in the equal proportion that is 2% weightage for every company of nifty fifty Even though reliance has 10% weightage. Likewise, 2% would be invested in your HDFC bank two percent would be invested in TCS, and so on. Also, in this way your financial services sector that contributions 37% but in the index fund weightage would only get 21 allocations due to your equal weightage.
Rebalancing which is much lesser than the nifty 50 indexes now if you ask me which is a better approach then honestly, I would say both market-weighted index and equal-weighted index can deliver a similar performance it is not that an equal-weighted index would completely outperform the regular index at all times or it is not that when there will be correction the equal-weighted index will not fall both would fall.
Always remember that both stocks and mutual fund investments are subject to market risk and their performance, would depend upon the overall market condition however it has been observed in the past that when there is a big market correction the equal-weighted index fund falls less as compared to your market-weighted index the reason is due to equal rebalancing of stocks and sectors rather than having a high concentration of a single stock or a single sector in the index.
One good statistic I found is that if you look at the long term return the nifty 50 equal weight index has done slightly better on average than the nifty 50 indexes over a longer period of time in fact over the 10-year period the equal-weighted nifty 50 indexes gave more return than nifty 50 indexes 72 percent of the times and over the last approx. 22 years your money would have grown 29 times had you invested in nifty 50 equal weight index.
I have mentioned some regular index funds in the past however if you want to explore the nifty 50 equal weight fund then there’s a new nifty 50 equal-weight ETF that has been introduced by the DSP mutual fund which I think is India’s first equal-weight ETF.
If you would invest in top 50 stocks of nifty 50 in equal proportion. So, there will be less concentration and more diversification. This also means no specific bias towards any stock or sector. Of course, there will be periodic rebalancing every quarter or annually.
So in this blog, we discussed the best way to invest for long-term wealth creation the right approach is to have a balance of both stocks and mutual funds.
Within mutual fund balance your investment across your active and passive funds if you are someone who is new to the world of investment then passive funds or index points are the best way to invest although you can certainly invest in stocks I would suggest having higher allocation in your passive fund, specifically ETFs since they can also be traded on the exchange.
Passive funds are also beneficial for someone who has a job or business and does not get a lot of time to research stocks and find it expensive to buy shares of the top companies in India.
Within the passive investment, you have both index fund and ETF and now you also understand the difference between your nifty 50 indexes versus nifty 50 weighted indexes I really like the idea of this equal weight strategy but I want to know what do you think about it. Let me know in the comments.