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.
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. For example, if say Franklin Balanced is a quiet solid performer in this category, it may not appeal to many.
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 don’t mind volatility*, need a fund without much maintenance” As suggested before, choose ICICI Nifty Next 50 Direct Plan Growth Option. * Returns will swing either way.
B: “I want a fund that takes risks, but has good risk management and good returns”. Try Quantum Long Term Equity Fund-Direct Plan Growth Option
Balanced funds will fall in either category A or B.
C: “I don’t mind risk, but don’t want to worry about fund performance” Try Quantum Equity fund of funds. Do not worry about it being a fund of fund – extra expenses and extra tax. As discussed before it is one of Turnkey mutual fund solutions to beat inflation.
D: ” I cannot stomach too much volatility. Can sacrifice on returns” Try Franklin Dynamic PE fund of funds (a debt fund). Or you can try newer funds like MOST Dynamic Equity fund based on the Motilal Oswal Value Index (MOVI) Or Edelweiss Dynamic Equity Fund (formerly absolute return fund) or IDFC Dynamic Equity Fund.
Be aware of the following:
Dynamic Mutual Funds vs Balanced Mutual Funds
Do not invest in dynamic equity funds if you wish to chase returns
Performance of Dynamic Asset Allocation Mutual Funds.
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)
Create a "from start to finish" financial plan with this unique open-source robo advisory software template
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About the Author
M. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.Content Policy
Freefincal has original unbiased, conflict-of-interest-free, topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content. We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.Connect with us on social media
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Do check out my books
You Can Be Rich Too with Goal-Based Investing
My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earnerThe ultimate guide to travel by Pranav Surya
This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)Free Apps for your Android Phone
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Hi Pattu sir,
I will share this post to my friend. He s yet to start the mf journey.
I know you are not a big fan of nifty crossing 22pe stats like some people not invest during high pe and invest only lesser than 22 pe.
I remember somewhere i read of your point like indian market is young to come to conclusion of that stats.
My question is, can my friend starts sip on nifty next 50 direct now?
Can you please share your thoughts
Hi Pattu Sir,
My friend wants to start his investing journey. He has a very long term of 15 years.
My question is can he start his first SIP now on ICICI nifty next 50 index(he has understood about the swing of next 50 vs nifty).
I know your view on pe 22 stats model (as others predict). As I read of your statement somewhere India market is young so we cannot conclude on pe 22 for a nominal level to invest.
Still wanted your opinion on starting the first SIP.
Now is as good a time as any!
Hello sir
Very simple and informative article.
Can a fund with high standard variation as compared to peers be more suitable for long term SIP considering we will get more units during the fall
Can we backtest this theory???
You will know about high volatility only after it has occurred. So backtesting that will not be meaningful. You can compare the performance of large cap vs mid cap funds as an example. You will notice (if you see rolling return) that mid caps do not always outperform.
I would like to point out that an equity fund may no longer have a tax advantage over a fund of funds
Hello Sir,
You mentioned above that “There is no need for ELSS mutual funds. I would avoid them”
any specific reason or do you have any blog for the same ?
I am interested to know because I have started with ELSS only.
If you do proper asset allocation, you can save tax with EPF + VPF or PPF with equity from elsewhere