‘Simplicity, convenience key attractions of investing in mutual funds’

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Investing in a mutual fund SIP can be just a couple of clicks away. But choosing a right fund to invest from thousands of schemes, deciding the right asset allocation (between equity and debt), choosing a right mode of investment (direct or regular), and fixing a time horizon for investment are some of the aspects that can be baffling to many new investors, especially to those who are not financially savvy.

“Simplicity and convenience of investing are the major compelling reasons why one should start investing in mutual funds, but what was supposed to make your life easy has become complex simply because there are too many choices,” said Dhirendra Kumar, Founder and CEO of mutual fund tracker, Value Research.

So, where should a new investor begin with? How long should one stay invested? Should an investor go for a direct or regular plan? These are some of the points addressed by Kumar during a webinar, ‘Mutual Funds – How to Get Started?’, presented by ICICI Prudential Mutual Fund and BusinessLine. The webinar was moderated by Lokeshwarri SK, Associate Editor, BusinessLine.

“Young investors who have just started earning and whose income fall under the tax bracket should avail the benefits of Sec 80C by investing in tax savings fund with a 3-year lock in period, which can offer better returns than other fixed income instruments,” said Kumar, adding, “or they can start with Aggressive Hybrid Fund, which has a built-in shock absorber with one-third or a quarter of the money invested in fixed income products to minimise the loss arising on account of a market collapse”.

Aggressive hybrid fund

Kumar suggested that both young as well as first-time investors in the age group of 30-50should go for an Aggressive Hybrid Fund, to begin with, for the first 2-3 years, to get themselves acclimatised with market-linked investments.

He also added that even if an investor has a lump sum amount from FD maturity, asset sales, bonus or superannuation benefit, he should spread the investment over a period of time to eliminate the risk of catching the market at a very high level.

For investors aged above 50, who are looking to invest their retirement corpus, Kumar suggested that they can invest a quarter of their investment in equity savings funds and three-fourth in fixed income products.

“Because of the equity component and conservative take on growth, this category will help people to beat inflation by a modest margin,” he added.

On choosing the right funds, Kumar said a new investor should look at key metrics such as choosing the right category, narrow the universe of schemes (by following good MF ratings), and check the consistency of risk-adjusted returns.

SIP is the only way

On the pros and cons of direct and regular plans, Kumar said although direct plans are cheaper and easier to invest, investors under this plan are left to take all qualitative decisions from choice of funds to quantum of investment and time frame on their own. On the other hand, though expensive, regular plans can be confidence-inspiring for many new investors, and drive them to invest rather than spend in other avenues.

“Investing your long-term money through SIPs is not only right away, but the only way for somebody to get started,” said Kumar while answering a question on lump sum versus periodical investment.

He also cautioned that monitoring the portfolio on a daily basis can be unnerving to investors due to dramatic changes in the market, and instead suggested that investors should spend at least 15 minutes once in every three months to review their portfolio to rebalance their asset allocation, based on their investment goals.