Beginning with the Investing Journey

Many amongst us are the first generation in our family who has ever thought about investing in stock markets. You might have given thoughts about open your trading accounts or investing in mutual fund. But in the end, did what most of our parents and other conservative people do i.e provident fund, LIC policy or bank FDs. But the downfall in these instruments is they are meant to save your money with inflation adjustment and now grow it. Moreoever, the real rate of return is even lesser.

Now if you believe in India’s growth story that India will grow to a $5 trillion and so on to eventually to a 20 or 30 figure then you must start your investing journey. The instruments mentioned above are just to keep your purchasing power intact. But in order to grow your wealth, one has to either invest or yourself start a business.

Index Based Investing

Indian stock market have been in a macro bull run since start of 1991. Our economy is doing well even during current times when Europe and USA are struggling with high inflation. So it becomes obvious that the stock markets will follow economic prosperity . And to commence you investing journey there is no better option than Index Based Investing.

As you can clearly see, the BSE Sensex or the Nifty 50 (Indian stock Indexes) have been in a general uptrend with since last 4 decades or so, giving an average return of 12 to 13% per annum. So, it becomes quite sensible to use this formula to generate wealth. One can simply find mutual funds based on sensex or nifty 50 via platforms like paytm money, zerodha, or via your banking agents. Starting and SIP (Systematic investment plan) where you invest a fixed amount monthly becomes most rational approach.

Here is a quick calculation of investing just Rs. 10,000 every month via SIP in index funds for a period of 20 years :

So, one can easily see that the total amount invested is just 24 lakhs, and returns generated are 90.5 lakhs amounting to 1.14 crore. Now get this, from year 21st onwards, the return generated will be more than half of the total invested amount.

Year 21 : Invested Amount 1,14,55,191

Estimated Return in year 21 : 13% of 1,14,55,191 = 14.9 Lakhs

SIP amount per year : 10,000 x 12 = 1,20,000

This is the power of compounding. Our minds are made to think linearly hence we often neglect how much it could become with time. Even Warren Buffett made 99% of his $100 Billion dollars after the age of 60. Given enough time, compounding is one of the best tool one can leverage.

The Famous Warren Buffett Bet

In 2008 during housing bubble crisis, billionaire investor Warren Buffett had a bet with a Active fund manager for a million dollars that S&P 500 Index would beat an actively managed fund in returns. Actively Managed Fund are those in which the fund manager actively buys and sells stocks in order to generate good returns which should be more than index. In 2015, the fund manager accepted his defeat, with returns delivered quite less than S&P 500 index.

This happened because as the financial markets mature and country moves towards a developed status, it becomes increasingly difficult to generate more returns than the underlying index. Hence, even in case of India also, 86% of actively managed funds were not able to beat the Nifty 50 in 10 years time frame. Hence, I would recommend to starting investing even with a small amount of just Rs. 1000 per month.

Some of the popular examples for index funds are UTI Nifty 50 Index fund, HDFC Sensex Fund Growth, ICICI Prudential Nifty 50 fund and so on.

"Many of you would have thought if your parents have invested in some X stock 20 years ago you would be have been millionaires today, well do not be that parent to your next generation"

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