Mutual fund categories to choose when starting your investment journey

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Investing in mutual funds requires patience as well as understanding one’s risk appetite. Choosing the right scheme today can be a daunting task given the options available and the market conditions.

The biggest mistake investors could make when beginning their investment journey is looking at past returns. Here is a checklist to follow if you are investing in mutual funds for the first time.

According to experts, timing the market for new investors at this point is going to be tricky. Also, they say that if initially, investors have good experience in the market, they tend to stay invested for the long-term.

Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth believes that it is good to begin the mutual fund investment journey with the portfolio of well-established companies. “A gradual approach to investing can work well at present, hence, SIPs (systematic investment plans) are the best way to begin in any market condition. Even if you have a lump sum to invest, you can invest 25% right now and the rest can be invested over the coming three months or through SIPs of six months,” he said.

With the market at an all-time high, Chetanwala suggests that first-time investors should consider investing in index or large-cap funds. “They should avoid small-cap and mid-cap funds at this stage as these are more volatile.”

According to Kirtan Shah, chief financial planner at Sykes and Ray Equities (I) Ltd, if one wants to do an SIP of 10,000, he or she can look at an index fund, a flexi-cap fund and a value fund, which will give the right kind of diversification.

“Historically, at such high valuations, value has worked really well. So, if someone is starting, they should keep few things in mind. Not try and invest in schemes that they don’t understand. So, thematic or sectoral themes, which are flavor of the season, can be avoided.”

Despite pricey valuations, experts say that for young investors who are new to the market, it doesn’t make sense to invest outside of equities. However, the investment horizon should be of at least seven to 10 years.

For Nishith Baldevdas, founder of Shree Financial and a Sebi-registered investment adviser, a balanced advantage fund would be the best strategy for investors coming into the market right now.

“It is dynamically managed and protects downsides as well. Ever since the Sensex hit the 46,000 level, we have been suggesting the asset allocation option. Newcomers are mostly coming in looking at the returns over the past one year. However, they haven’t seen the downside, which can be much more painful,” he said.

A balanced advantage funds, or also called dynamic asset allocation funds, has equity allocation between 30-80% depending on the market conditions.

“Even if investors have long-term goals, we are starting with BAFs, because we will be changing the strategy tactically once the valuations become attractive and less expensive. At time point, we might move to mid-cap or large cap,” said Baldevdas.

A good investment strategy for freshers at this point would be to stick to the basics of investment, stay away from flavor of the season themes.

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