Advice for novice investors

By Morningstar |  31-08-18 | 

I am 22 years old, just started earning. I don't have any particular financial goal currently. Have already started a PPF. Please suggest the mutual fund schemes to go for.

- Vaibhav

I am 22 years old and I just started earning. I plan to invest Rs 3,000 through sip for a period of 23 years and expect 15%return over the period. My risk appetite for this fund would be moderately low. Would you be kind enough to recommend me a few of mutual funds?

- Ankur

It is good to start off at a young age and have a long-term perspective in mind.

When you build a portfolio, you would look to make an allocation across asset classes depending upon your risk and return objectives and investment time horizon. We would recommend consulting with an Investment Advisor who will guide you through understanding your risk return objectives and help drawing up a suitable asset allocation for your portfolio.

We also suggest that you temper your return expectations and/or reassess your risk appetite.  Over the long term while equities have done well, their average returns have been 12% pa. If you have a moderately low return appetite, you would be looking to invest a majority of your portfolio in safer instruments like debt, which will lower your return expectations even more. (Do see the response to the next query to get a perspective).

If you are indeed looking to invest this money for the long term and do not have the need for interim liquidity, you can certainly increase your risk appetite and thus increase the equity allocation in your portfolio. But do understand there will be volatility in the interim, but as long as you stick to your asset allocation and intended time horizon you should be fine. If that is the way you would like to go, we would recommend a portfolio of 70-75% equity funds and the remaining in debt funds.

Within equities, you can consider investing in a mix of Large-cap, Mid-cap, Small-cap and Multi-cap funds, with a sizeable allocation towards Mid-cap and Small Cap Funds, as long as your risk objectives allow you to do so. Small-cap stocks are excellent wealth creators over the long term, but also can be quite volatile in the short term. 2018 is a classic case in point, whereby small cap stocks have fallen quite significantly and so have small cap funds. But if you have a long term horizon, small cap funds can serve you well. You can refer to our rated funds.

If you prefer a lower risk profile, we would urge you to spread your investment over a combination of debt and equity funds, with about 70% going into the debt fund. This will keep your risk profile low and at the same time give you a flavor of investing in the equity markets.  In order to tailor your portfolio to your requirements, you could either choose a debt and an equity scheme separately or invest in a conservative balanced fund which will give you the flexibility of investing across both the asset classes. You can find a list of conservative balanced funds here:

My goal is to have Rs 1.3 crore by December 2024. My SIPs in equity funds total Rs 77,500/month.

- Nuthan

With your current monthly SIP amount of Rs 77,500, assuming an equity return of 12%, your corpus would grow to Rs 1.3 crore by Dec 2024. While historically equities have delivered those returns annually over the long term,  given the vagaries of the equity markets it is hard to ascertain with what probability you will be able to achieve these returns over the next 6-7 years. For this it would be prudent to build in a buffer into your portfolio of 20%. You can do this by increasing your SIP amounts by 5-10% each year. This will help you achieve your Dec 2024 goal with a fair degree of confidence.

I am very new to investing. A basic question I have is, whether disciplined investing into a mutual fund (one fund) every month on a fixed date any different from a SIP in the same fund. Is there any benefit in making it a SIP?

- Sebastian

A disciplined investment into a mutual fund every month on a fixed date would be same as doing a SIP in that fund, if the amount of regular investment remains constant. However, in most cases, it has been observed that if this regular investment is left to the investor, then behavioral bias comes into play. On the day of investment, the investor may want to increase/reduce the investment amount or worry about market conditions or think of postponing the investment or may simply not have time to do it. All of this can incrementally impact investor’s long-term investment plans, and consequently investment goals. Investing through the SIP route takes care of all these predicaments and helps ensure that the investor stays on the planned path.

Also read: Is there a right date for SIP?

I am looking at a 15-year timespan. So, which is a better option; investing in an actively managed large-cap fund or a Nifty index fund?

- Tanmay

Historically, many of the actively managed large-cap funds have managed to outperform their respective benchmark (excess returns) over a longer time horizon. However, it is becoming increasingly difficult for fund managers of active funds to deliver the excess returns. As information becomes more transparent (easily available) and pricing efficiency improves, markets move in the direction of becoming more efficient. This reduces the ability of fund managers to outperform the benchmark on a consistent basis. Moreover, the fund management charges (FMC) of index funds are typically less than that of actively managed funds, which helps provide additional returns from index funds.

Having said that, actively managed funds in India still have room to generate excess returns; even compensate for the additional FMC applied. Hence, for the given investment horizon, you can consider having an equity portfolio that is a blend of actively managed funds and index funds, both. Index funds will help in generating returns that are in-line with the broader market, while actively managed funds can try to generate the excess returns.

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Kuldeep Jain
Jan 22 2019 05:46 AM
I am planning to construct house in the next 10 years which going to cost me around 60+ Lakhs. I want to make MF + Equity portfolio of 5 Lakhs lump sum and SIP of 10K monthly for Next 10 years. I have an aggressive risk appetite but wife is play safe woman. Currently, I am blocking all amounts in Bank FD’s.
Could you guide us in suggesting MF or Equity for portfolio distribution which can help me to achieve mine targets?
Mohammed Jasbeer
Sep 3 2018 07:35 PM
Can you suggest a good fund for investment of lumpsum 5Million INR for time horizon of 5-7 years , ready to take risk as this will be my surplus amount and money would not be required for next 7 years .
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