The question above is a very common one and has a very simple approach as an answer. The best way to go about is invest in equity markets through the route of mutual funds.
Now let’s go into details as to why we recommend so:
- Age: Since the person in question is young and new to stock market, the capacity is to take risk is higher. Hence the asset class suited for the person is equities as based on historical data and probabilities, a well-diversified portfolio in equities is the best bet for the longer run as an investment.
- Small investment: Amount of INR 3k per month is pretty small to start with in stock market and hence from a cost perspective the cheapest way to deploy it and yet get a diversified portfolio is through mutual funds.
A legendary stock market investor Warren Buffett’s advice to a novice is investing is to deploy money in equity markets and participate in capital growth story. The timing should be avoided and hence it’s best to do a systematic investment plan and a monthly deployment of capital is highly recommended. Since the question revolves around a fixed amount per month, it already fits into the framework recommended by wise men of the investing world.
Investment strategy for a student to invest in stock market online
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Why should one choose mutual fund and how?
Since its best to go to a doctor in case of illness and a lawyer in case of legal tangles, we all should accept to find a person who is well read and experienced in financial matters and does investment in stock market for a profession.
Choosing a mutual fund should be done carefully and one should for certain parameters and check the holdings of the mutual fund also before investing.
- A mutual fund should have preferably a higher assets under management and a lower fees structures. Having a larger AUM more often than not results in a lower fees per individual investor and hence it also helps reducing fees.
- Any fund without a long term outperformance history should be avoided. As a base case, a fund that is not ranked higher among peers on a 5-year time frame should be avoided.
- Growth fund is recommended over a dividend payout fund as it helps in maximizing exposure in the longer run. Direct plan is recommended to avoid extra costs.
- A well-diversified fund across sectors and market capitalization is recommended. A person should avoid taking cyclical or sector specific bets on funds to avoid additional risks.
- A fund manager’s past performance should be studied carefully and his or her market reputation should also be a criteria.
- Ideally one should choose at least 3-4 funds to deploy the capital.
Last but not the least a student should stick to the above plans if returns are not visible in the short term and have faith in the process. Shorter term outlook and judgement of performance should be avoided because stock market investments involve volatility and a lot of heartburns but in the end they reward for patience and discipline.
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