How to Earn Passive Income through Mutual Funds Investment

Indian stock market is as sentimental as Indians themselves. Even a small negative news can cause huge panic in market. Big players and well-informed investors exit at high price immediately and buy shares at low price later. Whereas, small investors who want to make one time investment and become rich in short span of time mostly suffer losses. One very important fact about share market is that, it is a zero sum game. Your loss is someone else’s profit. Those who buy shares based on reccomondations and speculations mostly lose money. If you do not know much about share market, it is better to invest through mutual funds which are managed by fund managers.

In long term, any passive investment does not yield more than 9% profit in India. Property rates are going down, maximum rental income is between 5 to 8%  and interest rate on FD are between to 5 to 8%. However, share market is booming from last 10 years. Share market can give you better profit if you invest smartly.

To minimize risk and to gain more than 10% return (subject to market risk), Mutual funds are good investment for the long term. They restrict your losses within a narrow band. For low risk and low return of 8% to 12%, you can invest in mix funds known as balanced funds (debt +equity). If you are willing to take moderate risk, and want better returns (if market does not crash abruptly), opt for large and midcap or Multi-cap equity funds. In multicap funds, fund manager has more freedom to choose shares from different catagory. However, recently SEBI has restricted this freedon by making it compulsory for each multicap fund to have 33% exposure in small cap and 33% in mid caps. Small cap equity funds are associated with high risk and high return. It is better to avoid pure small cap fund in short term investment.

If you want to avoid high expense ratio, always buy direct mutual funds. Regular funds always have around 1% higher expense ratio, which can cost you huge amount of money in long term. In addition, direct Index funds are even better having expense ratio around 0.5% or even lesser.

Important terms used in Mutual fund market.

• NAV: NAV stands for net asset value. It is the value of one unit of Mutual fund. Higher NAV does not mean over price of units like in stock market. It means Mutual fund performance is good and it is more famous with investors so they are investing more money.
• AUM: asset under management. It is the total amount of money managed under particular scheme.
• Expense Ratio: It is nothing but fund management charges. Lesser is better.
• S.I.P.: Systematic investment plan. It refers to monthly investment of money in any Mutual fund. You can invest even Rs500 per month in some funds. In this case, your SIP will be Rs500.
• Lump sum: One time investment.

If you do not have big amount of money to invest, then SIP is the best way to start investing in mutual fund as it average out your risk and profit. Do not wait till you save money to invest one time.  Start SIP as early in your life as possible. Read my previous blog to understand benefit of starting early by clicking here.