Mutual Fund Industry
| April 28
As the mutual fund debutante, it’s quite natural for you to feel apprehensive about selecting the right mutual fund scheme. Should you go with the tried & tested ones recommended by your friends/relatives/financial advisor or take a risk of investing in the one based on your research?
Well, the right mutual fund scheme depends on a number of parameters such as your investment goals, time horizon, risk tolerance and asset allocation preference. The outlook towards these parameters varies from age to age. In order to give you a holistic perspective to choosing the appropriate mutual fund scheme, we have taken into consideration two age groups: 21-35 years and 35+ years.
A young adult starting out on his career has many favourable factors to his advantage – more disposable income to invest, longer time frame (25-30 years), aggressive risk appetite and lesser financial responsibilities. As he ages, the family and financial obligations increase, but he is still better placed financially than his older peers. Hence, the recommended mutual funds for the beginners in this age group would be high risk-high return equity based mutual funds.
Equity mutual funds invest in stocks or equity, representing the ownership or share in the companies. As the company grows and earn profits, its market valuation increases and the stock price goes up, appreciating the capital invested. You also get an exposure to various stocks through equity mutual funds, so as to build a diversified portfolio, which in turn sets off the risk. Now, if you think that equity mutual funds are low on liquidity and you can’t encash them at the time of need, then here is a fact. Except Equity Linked Saving Scheme (ELSS) which has a lock-in period of 3 years, all other equity mutual funds can be redeemed at the NAV of the day you sell. In fact, if it’s not a financial emergency, you can track daily NAV and redeem on the day when you have chances to earn the highest profit. However, it is advisable to not withdraw your investment at least before 5-7 years.
In case, you are still not comfortable investing in equity mutual funds as the first time investor, you could test the waters via hybrid or balanced mutual funds (explained below).
This age group can be aptly called late bloomers as far as their interest in mutual fund investment is concerned. At this age, they start building corpus for children’s higher education & marriage, medical expenses of aging parents, other financial needs of the family and own retirement. Their risk tolerance is moderate and they look for investments that offer stability of returns and safety of the principal.
The recommended mutual funds for these investors would be either hybrid mutual funds or blue chip mutual funds. The reason for this is that the risk factor is relatively low, and the returns are steady and moderate in both these funds.
Hybrid mutual funds invest in both debt and equity to avoid the concentration of risk and volatility in equity funds. They are made of stocks, bonds and short-term money market. The pre-defined equity mix (at least 65% in equity) ensures that your funds can reap the twin benefits of capital appreciation and steady returns. These funds also rebalance your portfolio as per the fluctuations in the market. For instance, when the market falls, the returns on balanced funds fall lesser than that on the pure equity funds. The debt component provides cushion to your capital. Similarly, when the market goes up, the equity component can be tactfully reduced by booking profits, thereby enabling wealth creation over a long-term.
Blue chip funds invest in shares or stocks of reputed/well-established companies which have a credible track record in terms of performance, dividend payout and profitability. These companies have their brand value worth hundreds or thousands of crores. By the way, did you know that they get their name from the poker game where a blue chip is considered the highest and most valued chip? Blue chip funds are less prone to market volatility, their price movement fluctuates in the same range and are known to yield stable earnings over a long period of time, beating inflation and economic downturns. You can say that blue chip funds are dependable investment.
Experts recommend a rough formula to calculate how much of your mutual fund investment should be in equity. Simply subtract your age from 100. The answer you get is the proportion that you should allocate towards equity. For example, if your age is 35, then you should invest 65% (100-35) in equity mutual funds.
However, as mentioned earlier, the goal for mutual fund investment differs from one person to another. You are your own best critic to understand your financial position, money goals and risk-return expectations before choosing a particular type of mutual fund.