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How do I invest in Mutual Funds? INDEX INVESTING (Market Weighted vs Equal Weighted) | DSP - YouTube
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Hi, everyone. Welcome to today's video. So
on today's video, we are going to discuss
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about mutual funds. I will discuss my journey
of mutual fund investing, what mutual fund
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I am currently invested in. I will talk about
that also. And finally, we are going to take
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a look at equal weighted index funds because
index funds are picking up in India and you
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as a rational investor, must understand all
your options,
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what are the pros and cons? Because sometimes
we assume that index funds are super simple.
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You just put your money every month in an
SIP format in the index and you are done.
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No, there are multiple ways of thinking about
index fund also. That is what our discussion
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is going to be focused on.
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Super important video. You'll understand about
sector rotation, concentrated index mutual
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fund, what is happening in the SNP market
in the US, all these very important fundamental
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points I'm going to cover on today's video.
All right, so let's get started. I will speak
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in four simple points. Point number one is
around my journey of starting and investing
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in mutual funds.
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So when I started my stock market journey
per se, I started like any other retail investor.
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I used to invest a lot of money in mutual
funds. In fact, all my money in mutual funds
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only because I did not have the time to research
and analyze stocks and keep track of stocks.
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So mutual fund was the most convenient mechanism
for me in terms of making investments. Now,
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the biggest mistake that I made in terms of
mutual fund investment is and there is a video
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that I have done.
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Please take a look. Super important video
again. You will understand all the basic points
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around active mutual funds around passive
mutual funds and you will be able to make
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better investment decisions. But the major
mistake that I made in mutual fund investment
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was that I invested a lot in active mutual
funds. So I used to pay a lot of money in
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commissions and that depleted my return quite
a lot.
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There were multiple other problems. But one
single biggest problem that I'll have to point
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out is that by trading or investing in active
mutual funds, I used to lose a lot of money
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in terms of paying Commission. Now you might
believe that all mutual funds are evil. No,
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nothing like that. Mutual fund is a very respectable
industry in India.
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It is very well regulated and there are very
good mutual fund managers also. On top of
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that mutual fund investment, especially for
beginners, is almost given right. You have
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to do it because if you go on day one, when
you start investing in the stock market, you
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might go and purchase a bunch of stocks. You
might also start seeing some profit, but you
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would not know when to sell it, how to engage
with those stocks and a bunch of different
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problems. So when you are starting out, investing
in mutual fund acts as a very good net practice,
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right, so to say. That you start tracking
the market, you're not losing your money because
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mutual fund manager is sensible. They might
not give you insane amount of returns, but
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at the same time, you're not going to lose
your money also. Right.
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So it is relatively safer from that angle.
So this is a very important point that I wanted
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to explain. Now, where do I stand? So I've
been investing in the stock market for quite
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a few years now. I would consider myself to
be an advanced investor.
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So over time, as I have improved upon my understanding
of stock investing, my mutual fund portfolio
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has become really small. I'm still invested
in a few mutual funds. Some of them are very
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old because that is when I started and I haven't
sold those mutual fund units yet. So they
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are stuck from time to time. I also invest
in index based mutual funds, and I also take
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positions in liquid debt mutual funds.
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So this brings me to the second point. That
what exact instruments that I own and what
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type of mutual fund investments do I still
have? So predominantly speaking, there are
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two types of mutual funds that I invest my
money in. So the first mutual fund type is
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called as liquid debt mutual fund, right.
Now why do I use it?
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Because, for example, if I feel that the market
is overvalued and if I have a bunch of savings,
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then what I would do is that I'm just looking
for market opportunities where I can invest
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this money. So I will park that money. This
is more like a parking mutual fund that I
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just park my money in this mutual fund. Now
they are very easy to withdraw, right.
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So they are very easy to withdraw. You can
withdraw the money very quickly. No problem
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there. The rate of interest is also fine.
No problem there.
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There is no lock in, it's not as if that you
have to keep your money for a certain number
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of months. All that stuff. And the risk is
also low. The risk means that, for example,
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these liquid debt mutual funds are usually
invested in very safe instruments. So the
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risk is also low.
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Do I make the same returns that I make from
stocks from this mutual fund? Absolutely no.
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But the reason why I'm doing this is just
to park my money meanwhile, right. When I'm
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looking for market opportunities and I use
this instrument very, very frequently.
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So this is first type. Second mutual fund
that I use in terms of investing is the index
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mutual fund. Right. So index mutual fund is
something that I propagate investing in, you
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should keep a little bit of your money in
index mutual fund. I buy very selectively
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now, and there is a very specific purpose
that index fund investing does. It just helps
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me track my stock portfolio against the index.
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Right. That is the reason why I'm buying index
mutual funds sometimes. And especially again,
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if I'm not finding any specific undervalued
stocks for a certain duration of time, I'll
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put money in index mutual funds. Now, very
quick note here is that if you're a beginner,
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if you're a complete beginner, and if you
don't know anything about stock investing,
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mutual fund investing.
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And if you're just looking for one instrument
and you come to me and say that, can you suggest
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one instrument where I can park my money,
which will give me decent returns also, in
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terms of the risk that I'm taking, right.
So risk adjusted return. So I would say go
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and invest in index mutual funds. The commissions
are low, the risk adjusted returns are high.
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So all good good things are there. Right.
So that's the very basic part. Now, let me
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extend the argument so that you understand
the concept of index mutual funds really
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well. Because this is very, very important
for you to understand, because people don't
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have conversation about this part ever. Right
now, there are two different types of index
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mutual funds. One is called as market cap
weighted index mutual funds. And there are
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equal weighted index mutual funds right now.
Very quickly.
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Let me again explain to people who are new
to my channel what index funds are. So essentially,
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if you go and buy a stock of ITC, so you are
investing money directly in a company. So
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this is called as stock investing. Right.
But if you create a basket of two three stocks,
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for example, you have ITC
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also, you have HUL also, you have Tata Motors
also. And this is packaged in a mutual fund.
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So this is a basket that you are buying. That
particular basket buying is called as mutual
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fund buying
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right. Now, these mutual funds can be of different
different types when it comes to index, for
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example, in India, we have indexes like Sensex
and Nifty 50.
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So, for example, if you are looking to buy
a mutual fund, which is Nifty 50 mutual fund,
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now, this will have top 50 stocks from 50
companies in India. So that is what Nifty
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50 represents. This is the basket that you
are buying. So if you go and put Rs1000 in
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Nifty 50 index mutual fund, what are you buying?
You are buying these 50 stocks right, of Nifty
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50.
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So I hope this point is clear that what exactly
it is that you are buying when you go and
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invest your money in an index fund, right.
Or rather a Nifty 50 index fund, you are essentially
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buying top 50 stocks or top 50 Nifty stocks
in India. That's it. Right now you have two
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choices in terms of buying your index fund.
Now, you can do market cap weighted index
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mutual fund, or you can do equal weighted
index mutual fund.
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So let me explain both these things, because
this is very important for you to understand,
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especially given today's scenario. Now, if
you are buying Nifty 50 market cap weighted
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index fund, what are you buying now? This
is a list of Nifty 50 stocks and their weight.
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This is very important. So if you put RS100
in this Nifty 50 market cap weighted index
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fund, what are you buying?
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You are buying Rs11.21 of HDFC bank, then
you are buying Rs11.17 of Reliance, so on
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and so forth. So essentially what is happening
is that when you make the decision of buying
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a Nifty 50 index mutual fund, you will feel
very happy. But you will not know exactly
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how much in what proportion you are buying.
You are essentially buying. If you are buying
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market cap weighted index fund, you are essentially
buying in accordance with the weight of those
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stocks in that index.
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I hope this point is clear. If it's a little
complex, please rewind it. You will understand.
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From an example point of view, very simple.
If you are investing RS100 in a market cap
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rated Nifty 50 fund, you are buying Rs11.21
of HDFC bank because why?
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Because HDFC banks weight in Nifty 50 is 11.21%.
So this is the meaning of market cap weighted.
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Now, what is the meaning of equal weighted?
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So again, you have second option of buying
a Nifty 50 index fund and you can choose to
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buy an equal weighted mutual fund. I will
put some links in the description box also
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for you to check. Now here what is happening
is that for example, if you are investing
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RS100 in this Nifty 50 equal weighted fund,
then how much you are buying 50 stocks and
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you're only spending Rs2 per stock. So you
are buying Rs2 of HDFC, Rs2 of Reliance, Rs2
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of Housing Development Finance Corporation,
Rs2 of Infosys and so on and so forth.
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So this is the difference between market cap
weighted versus equal weighted. In equal weighted,
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you end up purchasing 50 stocks in equal amount.
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So I hope this difference is clear. This is
very important. You must understand this because
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it's very important for you even as novice
investor to understand where exactly your
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money is going. Now your next obvious question
here will be that which one is better? Is
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it market cap weighted right,
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is it better? Or is it equal weighted? Which
one would you advocate and why? It really
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depends on what you are betting on in the
market. It's not as if there is some fundamental
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problem with market cap or there is some fundamental
problem with equal weight. There are advantages
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and disadvantages.
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So let me very quickly take you through that.
So let's first talk about market cap weighted.
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So let's imagine a scenario where you are
putting RS100 in what? In market cap weighted
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Nifty 50 mutual fund. Now what is happening
here is that you are purchasing Rs11.21 of
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HDFC, then you are buying Reliance. Then you
are buying Housing Development Finance Corporation
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so on
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and so forth. Now, what happens is that, for
example, some of these Nifty 50 stocks will
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do really well. For example, HDFC bank might
do really well. Then next month, when you
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are doing your sip, the weight of HDFC bank
will go up because instead of 11.21, if it's
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market cap or the share prices go up, then
market cap will also go up. So instead of
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11.21%, it might become 11.5%.
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So more of your money keeps getting allocated
to stocks that are doing well. Right. So what
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you are doing is that you're doing growth
investing, growth investing, so to say. What
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you are essentially doing is that you're investing
more of your money in stocks that are already
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growing. Now you might have guessed it right
that if the market is overvalued, if you feel
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that, hey, the market is overvalued and something
like HDFC bank, hypothetically speaking, if
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it has already made its peak and it's not
going to go up, then the market might consolidate
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or that stock might consolidate, it will not
give you adequate returns or it might even
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fall because if, for example, let's say if
these stocks are trading at an all time high.
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For example, in the US Times, FAANG stocks,
Facebook, Apple, Amazon, Netflix, Google.
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These stocks have come down, why? Because
they have gained so much momentum after 2020
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crash that they had to come back at some stage.
So they have crashed. For example, Facebook
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crashed by almost 15% in a month. So huge
loss if you would have invested in SNP market
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cap weighted index.
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So this is the biggest disadvantage. The advantage
of market cap is that if the market keeps
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on going up and up and these big companies
keep on performing really, really well, then,
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of course, you will benefit a lot because
you are investing more money in companies
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whose weights are high. This is the primary
advantage and disadvantage. In simple terms,
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what I mean to say is that when you are doing
market cap base index investing, then you
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are getting concentrated.
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You are taking more exposure to certain number
of stocks only. For example, if you go and
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invest in today's market and market cap weighted
index funds, then you are essentially taking
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10% position in HDFC bank. Now you tell me
whether it makes sense to invest 10% as per
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today's rate in HDFC. Your answer might be
yes or no, right. So that is the primary advantage
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and disadvantage.
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And the major issue with market cap rated
index fund is that they have concentration
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risk. Now comes equal weighted Nifty 50 index.
Now in equal weight what happens is that you
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are investing RS100 and only Rs2 get allocated
here, here, here and so on and so forth. Now,
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what is happening here is that when the market
goes down, for example, and whichever stock
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is performing badly. So for example, let's
imagine that if ITC falls for some reason
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and then market cap of ITC becomes only 2%.
Then what are you doing?
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You're still investing in an undervalued stock.
So this leads to something called as value
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investing, right? That you are still investing
equal money in stocks that are falling or
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rising. Therefore, you end up taking positions
in undervalued stocks also. Another way of
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thinking about it is that you invest money
in HDFC bank, also whether it goes up and
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down.
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So here you have the possibility of catching
these undervalued stocks, so to say, and you
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are orienting your portfolio to companies
that are getting beaten now. So these companies
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because they have fallen, they can go up leading
to a boost in your holdings. So this is the
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primary advantage that this is called as value
investing. So you are taking more positions
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in beaten down stocks.
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So this is the primary advantage of equal
weighted 50 mutual funds. Now, if you say
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that, okay, given the market circumstances
that markets are hitting all time high, and
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I feel very uneasy taking like such big positions
in HDFC and Reliance right now. These are
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great stocks, no doubt about that. But right
now markets are rating all time high.
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But do you really want to take such large
positions in these type of stocks? If your
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answer is no, you will ask me that okay, what
are my options in terms of making investments
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in equal weighted Nifty 50? So I'll put some
links in the description box, but you predominantly
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have two options.
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So the first option is that you buy via the
mutual fund route. So you buy Nifty 50, equal
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weighted mutual fund or index fund. This is
simple mutual fund. So you go and place an
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order from mutual fund house and you can buy
this.
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The second route is Nifty 50 Equal weighted
ETF, right. Exchange traded fund. Now, exchange
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traded fund versus mutual fund,
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what is the primary difference now? Mutual
fund is a mutual fund. Very obvious, right,
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that there will be a fund manager this, that.
With ETF, ETFs are essentially like stocks.
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If you have a trading account from Zerodha
or any other app, then you can go and purchase
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this ETF.
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Very similar to how you buy stocks. So the
way you go and buy ITC stock. Similarly, you
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can go and purchase an ETF. Now, DSP is the
first company in India that has come out with
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this kind of an exchange traded fund. Now
these are getting very popular in US right
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now.
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These equal weighted ETFs, the reason for
that is very simple that if you take a look
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at S&P 500, right. If you take a look at S&P
500 and I'll put the link here also. Almost
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20% of its holding is in FAANG stocks FAANG.
So what happens is that if this S&P falls
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down by, let's say 10-15 percent. The S&P
will fall by 10%,
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but these FAANG stocks will at least crash
by 20% because of their large weight in the
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index. That is the problem with market cap
based indexes. Therefore, this equal weighted
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index is getting a lot of prominence in the
US market, and therefore a large amount of
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money is flowing in these equal weighted indexes.
So now you might have a question for me that
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hey Akshat, should I purchase like a mutual
fund, or should I purchase an ETF? Can you
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quickly explain that?
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Right. So this again comes down to your personal
preference, what you want to do, but very
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quickly, if I have to explain to the major
differences, ETFs are freely traded in the
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market. They are like stocks and can be brought
and sold as per the investors convenience.
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And there's real time transacting of this
because in mutual fund, what happens is that
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you place the order, then the order gets executed
towards the next day. Then you get delivery
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in like one or two days.
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So all that stuff is there. It's not real
time. ETFs are not like that. ETFs are literally
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like stocks. Now, fees and expenses.
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ETFs merely replicate the performance they
do not actively manage. But whereas for mutual
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funds, there might be some charges involved.
But look at the type of mutual fund that you
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are buying also. This is in general that I'm
reading out. So check the links in the description
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box.
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You'll get an understanding. Now, one more
very important point is regarding the lock
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in period that ETFs do not have any lock in
period. That will be true for Nifty mutual
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funds also, but just double check as per the
specific mutual fund that you are buying,
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whether there is a lock in period or not.
So essentially speaking, depending on your
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investment style and what you want to do,
you can purchase any of these, be it via mutual
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fund route, be it via ETFs be it equal weighted,
be it market cap weighted.
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But I'll just quickly summarize two very important
points, given the current market dynamics.
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So right now we are sitting at Nifty approximately
18,300. That is the level we have reached
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now, market, if you believe markets will consolidate
or markets are likely to fall down, then maybe
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taking exposure in equal weighted index fund
might make a little bit more sense, because
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let me show you the graph for Reliance. Right.
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So you see this period from 2009 to 2015,
2016 or almost 2018. Right. So almost 9-10
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years, Reliance's stock did not move at all.
It barely moved. And Reliance has a big weight,
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a huge weight in the market cap based index
fund.
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Now, if you purchase such stocks and take
very high exposure to it, your returns will
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turn out to be very low. So under such circumstances
and the markets have gone up quite considerably
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and you feel that the markets might consolidate
or might come down, it might make sense to
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diversify in the truest sense. So equal weighted
index might give you returns from that perspective.
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But if you believe in the story that stock
consolidation is not going to happen and the
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stocks are going to go up and the consolidation
might happen after quite a while, then you
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can invest in any index fund.
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It should be okay.
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Most rational approach would be to mix and
match and take little bit of positions in
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equal weighted and little bit of position
in market cap weighted index funds. So that
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is what my recommendation would be, because
it gives you a lot of diversification. So
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I hope you enjoyed the video. Please give
it a thumbs up and share it with your friends
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and I will see you the next time.
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