Experts say diversified funds are best way to start the journey International funds in particular haven't performed that well so far, so avoid them
ROOKIE investors often end up buying their first fund without knowing whether its the right fund for their portfolio. Often, agents sell them the flavour-of-the-month fund and investors realise only later that their investment decision was wrong. What should be the first type of mutual fund product that a novice should buy?
With options like gold funds, capital-protection oriented funds, plain vanilla diversified equity funds or low-cost index funds in the market, Financial Chronicle talks with experts to find out the pros and cons of the different options to help first time investors arrive at a reasonable solution.
Know yourself: Investing is a way of making your money work harder for you. Before, we get into discussing about investing; first, you need to know yourself. For you as an investor, your job is much easier as you need to ask only three fundamental questions.
So, the three fundamental questions are: How much money do you need?
By when do you want this money? How much downside are you willing to take to earn the money you need?
The first two questions talk about your gain and we know in this world there can be no gain without some pain. So, the third question is about your ability to take some heartburn.
The wrong funds: Be it equity, debt, gold or a mix of these three main asset classes, unnecessary risk never pays off. As a first time investor, one should avoid sector funds.
Dependence on one single sector makes the risk double even if the sector could be the month's favourite. Also one should look at the expenses for buying a particular fund.
Another important point to consider is the geography of the funds. International funds in particular haven't performed that well so avoid taking themes which have not worked. While for an experienced investor, a theme which has not worked could signal an opportunity, it's not same for the first time investor.
The right decision: Even if you are a first-time investor, if the strategy of the fund confuses you its better to stay away, feel experts.
They advise that diversified funds or index funds are the best way to start the equity MF journey or select a debt mutual fund as this will assure minimum volatility in returns.
It's important to start off on the right note. Passively managed funds try to resemble a portfolio which is already there. Here, the fund manager cannot make huge mistakes. One can try debt options also as the debut investment because debt fund returns do not vary hugely like the stock funds. Its advisable to consult your financial advisor before the final call.
