what should be my first mutual fund?

Last Updated on February 26, 2022 at 12:39 pm

Yesterday, we considered How to start investing in equity Today, let us discuss what should be the first mutual fund for a young earner or for new mutual fund investors. The financial services industry makes a big deal out of risk profiling. You cannot take theoretical answers about market volatility and provide investment advice on that! The true risk appetite of a person is revealed only when the market crashes.

This is the reason why asset allocation is so crucial. So if you have not read the previous post on how to gradually increase equity asset allocation, please do so first and then head back here.

The idea is to:

First, define a financial goal. Example: How to buy an Audi Car

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Second, determine a suitable asset allocation for that goal using the robo advisory template

Third, plan to reach the desired asset allocation gradually. For example from 0% equity to 60% equity in 2-3 years.

Fourth (only fourth), consider how to invest in equity. If you wish to use equity mutual funds, then let us consider the options.

First mutual fund, testing the water — Photo by Christine Rondeau

Before we proceed, two observations.

1: Some people recommend an equity-oriented balanced as a “first fund”. Nothing wrong with this provided it is treated as pure equity and the exposure to it is gradually increased. Please recognise that the reduction in risk from 95% equity to 70% equity is quite marginal. See Balanced Equity Funds: the low risk, high reward option.

However, choosing a balanced fund can be tough for new investors and they are likely to be misled by star ratings.

2: Some advisors start clients on a liquid fund or arbitrage fund and then gradually include equity funds. Not a bad idea, assuming other aspects of the plan are done right.

So let us get to the options.

A: “I need a fund without much maintenance” A simple Nifty or Sensex fund will suffice.

B: “I want a fund that takes risks, but has good risk management and good returns”. Try Parag Parikh Flexicap Fund. However, there is no guarantee its performance will sustain in future. Using index funds gets rid of this worry.

Suggestions:

1: There is no need for ELSS mutual funds. I would avoid them, especially as your first fund.

2: When people claim there is a “bull run”, euphoria, “markets are at a peak”, then it is a great time to start investing. Any time is good, but when the market is “high” then you can expect some downward or sideways movement soon and it better to begin your equity journey on a dull note. It will serve as a good reminder that the next “crash” is just around the corner. Personally, I had to wait for 5Y for a positive return in my retirement portfolio: The rise and fall of my retirement corpus (not the date of publication of this post)

3: Expect less and you won’t be disappointed!

Live long and prosper!