Handy tips for first time mutual fund investors
Author: Dr. Renu Pothen, Research Head, Fundsupermart.com India
This article was published in Moneycontrol.com on Tuesday, 11 June 2013
Many investors who wish to take an exposure into mutual funds for the first time, either glance through some online portals or participate in shows organized by TV channels wherein they can post their queries to experts in the domain. In the former case, investors blindly select five star rated funds in their portfolio without thinking about the reason for them entering the mutual funds space. On the other hand, the standard reply from the think tanks would be: “As you are a first-time investor you can either invest into large cap or balanced funds”. This advice is generally given on the assumption that both these categories of funds will give some comfort to naïve investors who have not yet experienced the vagaries of markets. However, in both these cases, investors are usually left in the lurch as they have no clue about the next step to be followed as far as their portfolio construction is concerned.
Recently, the Securities and Exchange Board of India (SEBI) came out with a diktat that clients should complete a risk profiling exercise before taking investment decisions. A risk profiler, as I have previously mentioned in one of my articles on Moneycontrol.com, covers aspects like the age of the investor, their investment objectives, time horizon, existing investments, income and liabilities and ability to take risks. Here, investors need to remember that the outcome of this exercise will be to throw some light on their risk-taking ability which will be essential while investing in mutual funds.
In such a scenario, I would like to jot down three main factors which investors need to take into account before entering into the mutual funds arena:
Existing Asset Allocation
Although an investor might be making his first investments into mutual funds, he would have had exposure to other instruments like direct equities, fixed deposits, Public Provident Fund (PPF), insurance, etc. Hence, investors should be clear about the amount of savings that they want to allocate to mutual funds and accordingly plan the asset allocation. Most of our investors tend to have a good exposure into savings instruments like fixed deposits and insurance but dread equities as an asset class. For these investors, parking some amount of surplus into equity mutual funds will be beneficial in the long run. On the other hand, if the investor has no exposure to the much-coveted yellow metal then a 5% to 10% allocation can be made into this asset class via the Exchange Traded Fund (ETF) route or through Fund of Funds (FoF).
Investors should select appropriate funds depending on the goals for which these investments are being made. For instance, if the investor is planning to build a corpus for his child’s education, then maximum exposure should be taken to equity funds. An investment into the same for a long time period will help him achieve the desired goal. On the other hand, if the investor wishes to purchase a home in the next one year then parking his entire surplus into equity funds will only invite trouble. In short, investors should take be aware of their short and long term goals and accordingly plan their investments.
An important component that needs to be taken into consideration is the time horizon for which the investments need to be held. Here, I am referring to a case wherein an investor has a surplus to invest for a 5 year time period, and accordingly should not be choosing just fixed income funds for this requirement. I have always maintained a stance that fixed income investments should be actively managed depending on the views on interest rates while the surplus parked in equity funds should be given time to grow over a long time span.
I am of the view that if investors have taken these factors into consideration then they should go about the next step of selecting the appropriate funds in their portfolio. At this stage, I would advise investors to select the categories of funds depending on their risk profile and also consider the following factors so that appropriate investment decisions can be made.
- Pedigree of the fund house
- Track record of the fund manager
- Performance of the fund during different market cycles
- Expense ratio of the fund
To conclude, investor responsibility doesn’t end with creating a portfolio, but also extends to reviewing it on a regular basis.