I am about to start my professional career around June 2021. I want to know the kind of mutual funds I should look for as part of my core as well as satellite portfolio, given that I am a risk-averse person. Also, I understand the importance of fixed- income debt instruments, but I want good inflation-beating returns. When evaluating a fund, what are the key factors I should look into?
Congrats on your plan to start investing along with the start of your professional career. You could reap rich rewards by staying invested over the years. Also, the mutual fund route to investing is a good one, especially in equities. Equity mutual funds, run by professional fund managers, invest in a basket of stocks, reducing risk.
Deploy money through the SIP (systematic investment plan) route — you can invest monthly in small doses and benefit from market volatility by averaging your cost of purchase. SIPs are especially recommended over lump sums in elevated market conditions, such as now.
There seems to be some disconnect in your objective of getting good inflation-beating returns and being risk-averse. Risk and returns go together — higher the risk, higher the returns; lower the risk, lower the returns.
Equity (stocks) comes with higher risk than debt (fixed-income instruments), especially in the short run, but it has the potential to generate superior inflation-beating returns in the long run.
Given that you are young, taking on some risk for better returns through well-run equity mutual funds is a good idea — subject, of course, to your own personal circumstances.
This is not to say that you should not invest in debt instruments — you must, given that diversification and asset allocation in different asset classes such as equity, debt and gold are key principles of investing.
It helps to invest with goals in mind, such a buying a house or vehicle, going on a holiday, etc. But even if you haven’t set goals now, start investing and earmark investments as you go along. Invest, even if small, and scale up as your income increases.
To start with, invest in a large-cap equity fund (say, Axis Bluechip), a large-cap-oriented flexi-cap fund (say, Parag Parikh Long Term Equity) and an aggressive hybrid fund (say, Canara Robeco Equity Hybrid) as part of your core portfolio — the strategic portfolio to provide good, steady long-term returns.
The above active funds recommended are rated 5-star by the BusinessLine Portfolio Star Track MF Ratings that take into account various return and risk parameters.
You can also add a large-cap index fund such as UTI Nifty Index, as part of your core portfolio to get passive, index-based returns. Invest in schemes of different fund houses to reduce concentration risk.
Large-cap funds and aggressive hybrid funds (mostly equity with a portion in debt) are less volatile than funds that invest mostly in mid- and small-cap stocks.
This is especially important now, after the sharp market run-up. While large-cap and hybrid funds may not deliver as well as mid- and small-cap funds in raging bull markets, their ability to contain downsides better is a key positive to motivate new investors.
As you go along in your investing journey, you can consider adding a well-run mid-cap fund, say DSP Midcap and a small-cap fund say, SBI Small Cap, in your portfolio as part of your satellite portfolio —– the tactical portfolio to give higher returns.
Overall, restrict investments to 5-6 funds. Have a long-term horizon of at least seven years. Review the performance of your funds once a year.
For your debt investments, consider safe instruments such as post office small savings schemes, say the Public Provident Fund (PPF), RBI floating rate bonds and deposits in well-run commercial banks.
Also, invest more in the Employees’ Provident Fund (EPF) through the Voluntary Provident Fund (VPF).
When evaluating a fund, some key factors to consider are the fund’s mandate, philosophy and strategy (whether it is prudent and in sync with your objective), long-term rolling returns (indicating consistency of outperformance over benchmark and peers), risk parameters (reflected in ratios such as Sharpe, Sortino and drawdown), size of the fund (whether it is reasonable enough to withstand redemption pressures), and expense ratio (a lower expense ratio improves returns).
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