When it comes to saving or investing money, most Indians would opt for fixed deposits or gold as they offer stable returns. But professional management, liquidity and diversification, among others, make mutual funds a good alternative to such traditional methods, and they provide superior returns over the long term.
The first step to invest in mutual fund schemes is to build a portfolio. While doing so, investors need to understand their goals and evaluate risk appetite. There, however, are a couple of warnings that are issued—mutual fund investments are subject to market risks and past performance doesn’t guarantee future returns.
As some may find the process cumbersome, BloombergQuint spoke with two financial advisers for a step-by-step guide about investing in the first of a four-part series on the weekly special The Mutual Fund Show.
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The most important part is to understand investment goals and preferences. “Goals should be SMART—Specific, Measurable, Achievable, Realistic and Time-Bound,” said Amit Bivalkar, managing director and chief executive officer at Sapient Wealth Advisors & Brokers Pvt. Having a well-defined investment goal, he said, can help avoid making mistakes that investors otherwise will.
Tarun Birani, founder and director at TBNG Capital Advisors Pvt., agreed. “The average equity return in the last 20 years is about 12% but when you look at average investor return in the same period then it is 6-7%. The reason for that gap is nothing but investor behaviour as they exited the market when they should’ve actually invested because they did not have clearly defined goal in place,” he said.
Having laid down a clear goal, Bivalkar said investors must evaluate their risk tolerance and accordingly decide their exposure into equities and debt. “If you have a long-term investment horizon, then it is advisable to have a higher exposure towards equities.”
While Bivalkar suggested a 60-40% equity-debt allocation for a first-time investor, Birani advised a 50-50 allocation with one very good equity fund with a long-term history and a mix of debt funds in the portfolio. “With experience and a better product understanding, investors can gradually scale up their equity exposure,” Birani said.
