How to invest in your first mutual fund

By Morningstar |  02-06-21 | 

Kaustubh Belapurkar, Director – Manager Research, Morningstar Investment Advisers, spoke with Money9 on how first-time investors should go about investing in mutual funds. Here is an extract from the interview.

How to invest in the current time in mutual funds when the need for liquidity to meet any exigency is high?

When you think about investing, one needs to have in place an emergency corpus that takes care of your expenses for six to twelve months. You also need to have health and life insurance before you start your first investment. Typically, most of us invest whatever is surplus after spending. Rather, investors should try to decide their investment amount first and then spend whatever is left. This will help them put limits on their discretionary spending. This works for people who have just joined the workforce or want to start their investing journey.

There are a plethora of categories and ways (systematic investment plan/lumpsum) to invest in mutual funds. what is the best way to invest in mutual funds?

The starting point should be to determine the goal (short term and long term). The type of fund you would invest for short term and long term goals are very different. The time horizon of your short term goals could be one week to one year while long term goals can be 5,10,20 years down the line. Mutual funds offer funds to meet every goal. Based on your goals, the asset allocation (equity, debt, gold) is decided.

Equity is a volatile asset class in the short run. For instance, the markets corrected by 30% in March 2020 due to the lockdown as a result of the pandemic. If your investment goal is ten years away, you should not worry about such intermittent volatility. If your investment horizon is short term and if markets correct after you invest, it would be detrimental to your portfolio because you need the money. The extent of risk you can take in your portfolio is a function of your goals, time horizon and your willingness to accept volatility. Risk-averse investors who are happy with steady returns without much volatility can choose debt funds. On the other hand, someone who understands risk and his/her goal is far away, equities can be more rewarding for such investors. Investors need to consider all these factors before they start investing.

What would be a preferred method (SIP or lumpsum) of investing for first-time investors?

Investing through SIP instills a financial discipline. Investors would keep that money aside on the SIP date. If you don’t have a SIP and the money is lying in your bank deposit, there is always an urge to spend it on buying something. We did a study on the market returns over a ten-year period. Over a ten-year period, only eight months out of that ten years accounted for the entire outperformance of the market. So if you missed investing in the market for those eight months, you would miss out on a big chunk of returns. This shows that time in the market is more important than timing the market. Stay invested and stick to your goals.

If one wants to invest lumpsum which funds would you suggest?

I would recommend fixed income funds even if the goal is three years away because you don’t have to time the market. If the goal is five years and above, the lumpsum money can be staggered into equity funds from a fixed income fund over three to six months.

When can one choose Balanced Funds?

Once your asset allocation is decided, one would typically choose an equity and debt fund separately. Alternatively, if you want one investment to meet the goal, a Balanced Fund can be considered if it matches your asset allocation mix. If you have 70% (equity) and 30% (debt) asset allocation, there are Aggressive Balanced Funds that invest a higher proportion in equity. If you want 20 (equity) and 80% debt, there are Conservative Balanced Funds that fit this asset allocation. We prefer equity and debt fund separately but if an investor wishes to have one fund Balanced Funds are ideal. Both approaches are fine.

Should one invest directly or invest via a financial adviser?

Most investors look at past returns while investing. A lot of Do it Yourself (DIY) investors will go for funds that have delivered the highest return in the recent past. If some sectors start performing well, investors will jump in to buy sectoral funds. An adviser plays the role of a behavioural coach. If you don’t have the wherewithal to ascertain your goals, decide your asset allocation and choose the right funds which match those goals, I would recommend you invest through an adviser. The adviser would not only construct the portfolio but would also help you keep your emotions in check when markets turn volatile. Making wrong investment decisions can cost you much more than what you would pay to a financial adviser in terms of commission or fee.

Watch the full interview here.

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools
Ask Morningstar