Last Updated on February 26, 2022
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
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.
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!
Re-Assemble: money management basics for young earners
Re-assemble is a series focussing on the basics of money management for young earners.
Step 1: Listing your goals dreams and nightmares
Step 2: Lay the Foundations to Get Rich creating an emergency fund
Step 3: How to buy Term Life Insurance
Step 4: How to choose a suitable health insurance policy
* Apollo Munich Optima Restore Benefit vs Max Bupa Re-fill Benefit
* Star Health Comprehensive Insurance vs Religare Care Comprehensive Insurance
* Building a health insurance comparison chart + Cigna TTK vs Royal Sundaram Health Policies
* How to buy a Super Top-up Health Insurance policy
* How I selected a health insurance policy
* Why we all need a corpus for medical expenses and how to build it
Step 5: How to select a credit card for maximum benefit
Step 6: How to track monthly expenses and manage them efficiently
Step 7: How to close your loans and live debt-free
Step 8: How to buy a personal accident insurance policy
Step 9: Are you ready to let go and let your money grow?
Step 10: Investment planning case study 1: How to create an investment plan
Step 11: Case study 2: Retirement planning for 27-year old Amar
Step 12: Three Key Factors that decide how we achieve our financial goals
Step 13: How to start investing in equity?
Step 14: What should be my first mutual fund? (this post)
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