Mutual Funds: Investment Planner Handbook + Download for free.

Everyone talks about mutual funds, but the more chatter, the more confusing it becomes to select the right products. And then, with more than 3000+ mutual fund products today, choosing the right product is not simple at all. Most investors believe that selecting the right mutual fund, the one with the highest historical returns, is all that matters.

Having a plan is more important than choosing the end product. In fact, 80% of your efforts should go into planning and just 20% should go to execution. When you decide to invest via a mutual fund distributor, they do this heavy lifting for you; most often, they may not explicitly show you how complex the planning process is, but if you ask, they might be glad to share it.

Let me illustrate the 10-point idea that goes behind a proper investment plan. I am providing an example of an investor who wishes to raise funds for their retirement. You can also download this PDF for later use.

Step 1: Check Readiness

Before you start investing, check the investment health of your household. The first thing you would need is a life cover for all the earning members. A term plan (cheapest life insurance) would do the trick. If you wish to retire by age 60, then your term cover end date should be 60. If you want to retire earlier, say 50, then set the tenure to 50. A lower tenure will decrease the premium rates.

Rationale: Insurance is based on your human life value, i.e. the cost of replacing your active income. If you are retiring, it means you no longer have an active income, so there is no need for insurance.

Retirees enjoy passive income, and in the worst-case scenario of your passing, those funds can go to your nominees or legal heir; hence, a term cover is not necessary. However, if you wish to pay for insurance till 70 or 80 years, you may do so.

Step 2: Check KYC and Investment account readiness

Investing requires many formalities to be completed. Know your customer (KYC) is the first one. You need to enter your pan card details, date of birth, email id and phone number to get started. KYC will also check the status of your PAN Card, Aadhar card, Digilocker enablement, and request your digital signature and photograph. Once the KYC process is initiated, the KRA status has to go to Validated or Registered to begin investing.

KYC can be done either as a Resident Indian with a savings account or as an NRI with either an NRE or an NRO bank account.

Once your KYC is complete, you can proceed with account creation — either online or offline. Most distributors will help you create an account instantly. Once your account is up and running, you need to add the bank account and get it verified (usually by a 1-rupee penny drop).

Step 3: Set the Debit Mandate

A debit mandate is an instruction that you provide to a bank to authorise them for any withdrawal request raised by the mutual fund companies. If you set a mandate of Rs 50,000 per month, it does not mean that Rs 50,000 will be debited immediately. The debit will only happen when you start an SIP with the mutual fund companies.

If your SIP amount is Rs 10,000 per month, then rest assured, only Rs 10,000 will be withdrawn and not Rs 50,000.

Step 4: Retirement Planning

This is the most complicated aspect. You are setting a goal, say, 15 or 20 years from now, and you are assuming things with your current financial status, income, and expenses. The reality is that your income, costs, and financial milestones change over time; hence, retirement planning is a flow concept and not a stock one.

The things you need to list down for retirement planning

1. Your current monthly expenses.
2. Your current income.
3. Age of retirement & number of years left.
4. Age in retirement, i.e. years for which our corpus should last.
5. Your current savings percentage.
6. Annual inflation expectation: 6% or 7% for example.
7. Interim financial goals — child’s education, marriage. House/car purchases etc.

Step 5: Selection of Funds

20% of the efforts should go into the selection of the mutual funds that fit your retirement plan. The main things you need to consider are the goodwill of the AMC and the strategy they are using for fund selection. This strategy should align with your investment objective for maximum psychological fulfillment.

You need not be ashamed to change the AMC if its investment objectives are not meeting, or if there are any outstanding issues with the regulator. For example, there was a recent front-running accusation against an AMC recently, and I asked my investors to divert fresh allocations to a different mutual fund house.

Step 6: SIP Set up

You need to derive the monthly SIP amount required to meet your investment criteria. For example, if your retirement is 20 years away and you need 5 crores, then the SIP necessary would be: 45000 per month

Since your bank mandate is already in place, you need to configure the funds and begin the SIP. In this specific example, you already had a bank mandate of Rs50000, so a Rs45000 SIP works out well.

In case your SIP amount was 60000, then you might have to raise a new debit mandate request of 60000 or more.

Opt for a step-up SIP. If your income is rising by 10%, ensure your SIP is also increasing by the same percentage.

Step 7: Check Portfolio Monthly

Most newbie investors make the mistake of checking the portfolio daily. This is a recipe for disaster, as equity funds, which are linked to the stock markets, can exhibit significant volatility. The best practice is to check the PF once a month; alternatively, you could ask your financial advisor to send you a snapshot on a predetermined date every month.

Mutual funds are long-term wealth creation platforms. You should only be worried if the nation’s GDP is declining for 3 quarters, then reach out to your financial advisor to activate “wealth protection mode”. If the country is not growing, the stock markets will start to correct.

Step 8: 3-monthly review with your financial advisor

I ask all my clients to come back for a 1-hour session every quarter. Less than 20% of them do so. The quarterly review helps in course correction and updating of financial milestones achieved, if any. A necessary rebalancing can also be done every quarter.

In a year’s time, you will have met the advisor 4 times. A separate yearly review is not required unless there is a significant change in financial status.

Step 9: Activate wealth protection mode if the goal is met

Your retirement plan would be for 25 years. In case the objective is met in the 22nd year, do not hesitate to instruct the financial advisor to activate the wealth protection mode. If the stock market crashes in the 23rd or 24th year, you might lose your retirement corpus and would be left with neither time nor health to recoup it.

Step 10: Keep an eye on taxation

With the current government at the helm, one thing is sure — “The taxation is only increasing”. Higher taxes mean you keep less of your retirement money. A better alternative would be to increase your corpus target 1.33x to offset the tax outgo.

That’s it!

These are the 10 things that you need to keep in mind as a new investor. Even without you asking, your financial advisor would keep track of your goals, financial milestones, and progress. If you could engage with them actively, the planning and execution process would become much more interactive & exciting.

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