Mutual Funds

Your Fund Portfolio

Anand Kalyanaraman | Updated on March 01, 2020

I just started my first job, and plan to invest ₹2,000 a month. Can you please suggest how I can divide and diversify to invest in various asset management companies? Which fund would be suitable for me?

Karthick Udaiy

Congrats on starting your investing journey at a young age! For investing, time is of the essence. An early start can help you make the most of the wonder called compounding — it should pay off handsomely in the long run by helping you accumulate a much larger corpus than someone who starts off late.

It doesn’t matter that you plan to start investing with a relatively small amount (₹2,000 a month). What’s more important is that you start, even if small, and then continue deploying money smartly and on a systematic basis. Well begun is half done.

As and when your income increases and you can save more, do invest more. It is important to increase your investment amounts in the future to be able to accumulate a sizeable corpus. Also, the money has to be deployed in the right instruments — you must have proper asset allocation (across equity, debt, gold, other asset classes) depending on your return expectations and risk appetite. So, an early start, reasonably tidy sums of investments and right asset allocation are all important for meaningful wealth creation in the long run.

Ideally, investing should be goal-based. But even if the goals are not clear at your stage in life, start investing and earmark investments towards goals when they crystallise.

But before you start investing, provide for some non-negotiable essentials.

One, save for emergencies in a contingency fund (eight to 12 months’ expenses kept in a bank fixed deposit). Two, buy adequate life insurance (if you have dependents) and health insurance through online, term policies.

Now, coming to investments, given that you are young — with a presumably good risk-taking ability, a long time horizon and no pressing financial commitments — equity will be a suitable investment choice. While it can be volatile in the short run, equity has the potential to deliver superior inflation-beating returns than debt in the long run.

Unless you have the know-how, you could burn your fingers investing directly in stocks.

Instead, start investing in well-managed equity funds through the monthly systematic investment plan (SIP) route. This lets you tap into the expertise of professional money managers, inculcates discipline in investing, gives exposure to a basket of stocks, thus diversifying risk, and helps you benefit from market volatility by reducing the average cost of purchase. SIPs are especially recommended over lump-sum investments now, given the run-up in the benchmark indices.

Begin with relatively less risky, large-cap equity funds or equity-oriented balanced funds. While these funds may not deliver as well as mid- and small-cap funds in raging bull markets, their ability to contain downsides (restrict losses) in weak market conditions can be a key positive to motivate young investors like you.

Given that your investment outlay is only ₹2,000/month, you can invest in just one fund and not spread the money across many funds.

Among large-cap equity funds, Axis Bluechip is a good choice, while SBI Equity Hybrid is among the better-performing equity-oriented balanced funds. They are rated five-star in BusinesssLine Star Track MF Ratings.

Once you get comfortable with the investment process and can also invest more, you can increase your SIP amount and can also start SIPs in well-run multi-, mid- and small-cap funds — these are riskier than large-cap and balanced funds but can get you higher returns.

Restrict your investments to 5-6 mutual funds; too many funds could get difficult to track. You can invest through regular plans (via distributors) or directly with the fund house.

Going direct saves distributor costs and improves returns, but is recommended only if you have the know-how to pick good funds.

Invest 75-80 per cent of your investible surplus in equity mutual funds, 15-20 per cent in debt instruments (EPF, post-office small savings schemes and bank fixed deposits) and the rest (about 5 per cent) in gold (sovereign gold bonds). The proportion of equity can be reduced and debt increased as you age.

Have a long-term horizon (at least five years) for equity funds. Review the performance of your funds once a year.

Send your queries to mf@thehindu.co.in

Published on March 01, 2020

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