Just started investing in mutual funds? Here are the next steps!

Published: May 8, 2020 at 9:40 am

Last Updated on February 12, 2022 at 6:17 pm

If you have just started investing in mutual funds over the last few years, perhaps via a SIP, then here is what you should do next! These would help increase confidence and not fear market crashes or years of no returns (yes that is possible!).

According to the AMFI, the number of mutual fund investor accounts has more than doubled in the last five years with 8.38 Crore accounts as on June 2019.

So  I would wager that at least half the readers of this article are relatively new investors. Sadly as is almost always the case, most of those new investors started after the market moved up. Meaning their first experience would soon be a fall or prolonged sideways movement. Therefore these next steps to fortify a portfolio become crucial.

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1: The first step I would recommend is to look up what investors since Jan 2017 have learnt about market risk and reward: What 100 plus New Equity Mutual Fund Investors Learnt Since 2017! Facing risk and poor returns in the first few years of the investing journey are probably the best thing that can happen to an investor. Imagine what these investors would say now, after the fall in the markets. It certainly was in my case: Ten Years of Mutual Fund Investing: My Journey and lessons learned

2: Ask if you are investing for the right duration. If you are investing in equity mutual funds money that you require within the next five years, then I would recommend stopping your SIPs and invest only in simple safe fixed income like FD or RD. If the ongoing crash in the bond market spills over to the equity market (it is only a matter of time before it does) then you can forget about what you wanted to buy in 3/4/5 years.

3:  Are you investing only in equity funds? This is a big mistake that young and new investor do. They assume (without experience) that they can handle the risk because they are young and put all their money into equity mutual funds. Look at what the new investors had to say about risk! Never do this!

Whether you need money in 15 years or 25 years or 35 years, always never exceed 70% equity. I would recommend 40% initially for those who are new and gradually increasing to 60% and no more.  There are two things to be done.

Out of every Rs. 100 that you can invest (this includes your monthly EPF or NPS mandatory contribution), invest no more than Rs. 60 into equity funds. I would recommend starting with less, getting used to the risk and then increasing it to Rs. 60.

Then out of every Rs. 1000 invested, no more than Rs. 600 should be in equity funds. Since the market moves up and down, this ratio will get upset every now and then. Initially, if you decades away from your need, you can let this bet. After say three years or so, once a year, you need to reset the portfolio. That is, say, the equity allocation has increased to 65%, then sell 5% of equity MF units and buy fixed income. This is known as portfolio rebalancing and is key to your peaceful sleep.

4:  Associate a goal with your investments. Your primary concern should be retirement planning. So please use a retirement calculator and make sure you are investing enough. If you use the Freefincal Robo Advisory Software Template, you can automatically compute the asset allocation and how it should change year to year. The aim is to compute the right investment amount for a variable asset allocation from day one to prevent later shocks.

The primary reason to associate investments with goals is risk management. When you have a target corpus, you can ignore returns from your mutual funds and focus on how much money you need. Of course, the goal planning calculation has to be done each year. This is why I could still maintain my financially independent status in spite of only 2.75% returns from my mutual fund portfolio after 12 years!

Many investors argue that returns are important. There is a difference between annualized return and overall gain (more on this later): How can a 400% profit result only in 8% return?! Hodling to the moon Risk!

This is what will happen if you leave a SIP alone: 15-year Nifty SIP returns crash to 8% (51% reduction since 2014). If you do not have a plan, you are essentially leaving your investments in the hand of luck. The only people who would gain are the sales guys and AMCs

5: Are you holding too much-fixed income? For many new equity mutual fund investors, this is a problem. They would have most of their money in PPF or EPF and the asset allocation would be lop-sided. I would suggest a slow and gradual shift from fixed income to equity over 1-3 years (max 5 years) depending on your comfort level. However, this shift should be executed in a systematic way.

6: Is my portfolio diversified or di-worsified? Sadly most investors start four sips for Rs. 500 each in four large cap funds. If you are holding more than one mutual fund then it is already one fund too many! Stop buying more!

Step 7: Learn how to monitor your portfolio! Stop looking at daily gains, losses and your fund XIRR/CAGR. That is completely useless! Monitoring portfolio implies checking how volatile your portfolio, how risky your portfolio is compared to the market (beta) and therefore check how well diversified it is.

The only way to do this is with data. You can the daily or at least weekly or monthly portfolio value. Most apps or online tools do not give this. So either you record it yourself or set some sort of trigger via an API. If you like excel then you can either use my Automated Mutual Fund Performance Tracker for a full goal-based solution or use the Mutual Fund Portfolio Growth Visualizer With Index Benchmarking for just the portfolio growth graph.

You can consult  my personal financial audit 2019 to see how to analyse this visually. I can get into more details on volatility and beta calculation if you are interested.

8: Are you investing more and more each year? Your aim should be to increase the total investment amount by at least 10% each year (at least for the first few years). This will define how wealthy you grow later.

9: Reevaluate your goals once a year. Use the latest annual expense, use the latest current cost of college education or a car or vacation and redo the calculation and get a new target corpus estimate. This will help you keep track of the moving goalpost.

Give these nine steps a try and you will grow in confidence and not fear market crashes!

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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