How Swarup selected his First Mutual Fund?
The other day, I had a conversation with my employee, Swarup, who works as a 30-year-old digital marketer at Findola Capital in Raiganj. During our discussion, Swarup expressed feeling a bit overwhelmed when it comes to managing money. As our conversation unfolded, I discovered that Swarup’s uncle intended to gift a substantial amount from his retirement fund, and Swarup had been contemplating investing a portion of the monthly earnings.
Swarup is well aware of the benefits of mutual funds and understands the importance of starting a systematic investment plan (SIP) for regular salary-driven investments. However, there was a slight hesitation. “So what’s holding you back?” I inquired. Swarup responded, “I want to pick the ‘best fund’!” That was the stumbling block. The uncertainty of how to select the first mutual fund. So, here’s what I shared with Swarup.
I explained that there’s no one-size-fits-all approach to determining the ‘best’ mutual fund, and the process can be both intimidating and subjective. The key is to identify a few funds that align with individual needs and goals. I acknowledged that with numerous options and multiple factors to consider, the task might seem daunting, but with a systematic approach, Swarup can confidently embark on this investment journey.
Understanding your personal financial goals, risk tolerance, and investment timelines is crucial when selecting a mutual fund. To guide Swarup through this process, I introduced a simple framework that he could use to choose a fund that suits his needs.
- Identifying Financial Goals:
- Swarup, being 30, has both growth-oriented goals (like retirement and children’s education) and capital preservation goals (such as a house downpayment or emergency fund).
- Recommended an equity-oriented mutual fund for growth-oriented goals due to their potential for better long-term returns.
- Suggested a debt mutual fund for capital-preservation goals, offering lower risk and steady returns.
- Calculated the appropriate allocation for each fund based on his financial goals.
- Understanding Investment Comfort:
- Acknowledged that Swarup is a first-time investor and somewhat risk-averse.
- Advised starting with aggressive hybrid funds for long-term goals, which have a balanced mix of equity and debt.
- For experienced investors with a higher risk appetite and a horizon of more than five years, recommended pure equity funds.
- Determining Investment Horizon:
- Emphasized the importance of the investment horizon, considering Swarup’s retirement goal in about 20 years.
- Suggested equity mutual funds for long-term goals, as they allow for potential high returns and recovery from market fluctuations.
- For short-term goals like a house downpayment within three years, advised safer, low-return funds.
- The Decision:
- Swarup opted for an ‘aggressive-hybrid’ fund for her long-term goals and a ‘short-duration’ fund for the short-term goal.
- Recommended reviewing the portfolio after three years to make adjustments based on experience and market conditions.
Takeaway: This framework is applicable to new investors like Swarup, providing a structured approach to selecting the right mutual fund. By answering these three crucial questions and aligning them with the options, investors can confidently make informed decisions.
Mutual Fund Selection Framework:
| Critical Questions to Ask | Option 1 | Option 2 |
|---|---|---|
| What are your financial goals? | Capital growth for retirement or child’s education. Consider equity-oriented funds. | Capital preservation for down payment of a house or building a corpus for a health emergency. Consider debt funds. |
| What is your experience level in the investing industry? | New investor. Consider less risky funds, such as aggressive-hybrid funds. | Experienced investor. Consider higher risk funds, such as equity funds. |
| What is your investment timeframe? | Long-term. Can afford to take on more risk. Consider equity mutual funds. | Short-term. Avoid major losses. Consider safer, low-return funds. |
To Conclude: Once you’ve shortlisted your initial investments, refer to our Analysts’ Choice feature, which helps in selecting top-performing funds in respective categories.
Disclaimers:
An investor education initiative By Findola Wealth Research Team.
This article is generated and published by Findola Wealth Research Team.
Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.
