what should be my first mutual fund?

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. 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)