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The Beginner's Magic Formula For Investing

Investing probably feels overwhelming to you right now. Charts, stock tips, experts on TV… It's enough to make you want to park everything in a savings account. But you don't need to overcomplicate this. You just need a simple framework that works.

There's something called the Magic Formula for Investing. It is just a method to find good companies:

At its core, it ranks companies using two ideas:

Return on Capital (ROC): How efficiently a company turns money into profit. Higher = better. (Businesses that know how to turn money into more money.)

Earnings Yield: How cheap the stock is compared to its profits. Higher = better. (Stocks that are selling for less than what they're really worth.)

Sounds easy, right? The problem is that picking stocks directly can still be risky when you're just starting. So here's a plan you can actually use. This is built for a beginner, with medium risk tolerance, and ₹80,000 to invest (it can be any amount in your case).

Step 1: Value-Oriented Mutual Funds (60% = ₹48,000)

This is where most of your money should go. Mutual funds spread your risk across many companies and are run by professionals who already follow value principles. You get exposure to undervalued businesses without doing the hard work yourself.

Funds worth looking at:

  • ICICI Prudential Value Discovery Fund (Direct-Growth): ~26–27% trailing 5-year CAGR (as of Sep 2025).
  • HDFC Value Fund (Direct-Growth): ~22–24% trailing 5-year CAGR.
  • Nippon India Value Fund (Direct-Growth): ~25–27% trailing 5-year CAGR.

Note: These are historical returns from an unusually strong period. Don't expect these high CAGRs to persist.

What does that mean for you? If you stay invested for 5+ years, you can expect around 10–15% returns per year going forward. Some years will feel rough (10–20% dips happen), but SIPs and patience smooth it out.

Step 2: Nifty Value 20 ETF (20% = ₹16,000)

This ETF gives you exposure to 20 value-tilted companies from the Nifty 50, selected using ROCE, PE, PB, and dividend yield criteria. Current top holdings include ICICI Bank, Infosys, ITC, TCS, and SBI (holdings change over time).

  • Trailing 5-year returns: ~18–19% CAGR (as of Sep 2025). Again, this was an unusually strong period.
  • Risk: Swings of 10–15% are normal, but way safer than gambling on single stocks.

For you, this is the "set it and forget it" part of the plan.

Step 3: Simplified Stock Portfolio (20% = ₹16,000)

If you want to learn and get hands-on, this is where you experiment. Keep it small (just 20% of your money) so you don't stress too much.

How you find stocks:

  • ROC > 15%
  • P/E < 15 or P/B < 2
  • Market cap > ₹1,000 crore

Pick 5–7 stocks like these. Put ₹2,000–3,000 in each. Hold for 3–5 years. Don't panic sell when markets dip.

What You Can Expect

Returns: Around 10–15% annually if you stick with this. That's better than FDs (6–7%) and beats inflation (~5–6%).

Upside: Your stock picks could lift returns closer to 15–20%.

Risk: Markets will swing. Sometimes you'll see 10–20% drops in your portfolio. That's normal.

Taxes:

  • For sales on/after July 23, 2024: Long-term gains (>1 year) are taxed at 12.5% after ₹1.25 lakh annual exemption. Short-term gains at 20%.
  • For sales before July 23, 2024: Old rates apply (LTCG 10% over ₹1 lakh; STCG 15%).

Your Action Plan

  1. Put ₹48,000 into value mutual funds.
  2. Put ₹16,000 into the Nifty Value 20 ETF.
  3. Put ₹16,000 into 5–7 stocks you screen yourself.
  4. Hold everything for as long as you can.

Final Words

The "magic" here isn't in finding the perfect stock. It's in discipline. It's you choosing to follow a plan instead of chasing tips. Most beginners lose money not because markets are bad, but because they panic, overtrade, or expect overnight results.

If you stick to this approach, you'll build wealth. Slowly at first, then faster as compounding does its job.

You don't need to be smart. You need to be consistent.

Good luck.