How A Young Investor Can Build A MF Portfolio?

If you have just started a career and wish to kick start some savings, then mutual funds can be a great way to do it systematically.

But then, if you are new to equity markets, then investing in equity mutual funds and experiencing any short-term volatility can spook you out of mutual funds, which otherwise make for great long-term products.

Hence, for an investor with little or no knowledge about equities, the following steps may make life easier:

– Consider making a start with debt-oriented products (such as MIPs), which offer 10-25% exposure to equities. This will provide a good entry point to equity investing.

– It is a misconceived notion that MIPs are only for those who look for monthly income. MIPs can be held with a growth option. Their simple aim is to generate debt-plus income, with the additional equities they hold. This may be a better option than going for a recurring deposit.

– Hold some surplus in liquid/ultra short-term funds to build an emergency fund, or if you would like to set  aside some amount for your own spending – ranging from buying a mobile, to going on a vacation, or for expenses incurred to apply for B-school a year or two later.

Consider parking your incentives and bonuses in this kind of contingency fund. You can always shift this money to other investment avenues later. It is likely that it will be spent if it remains in your savings account.

  • In about a year’s time, you can gradually add balanced funds which will offer 75% exposure to equities (and the rest in debt) and then a year from then, start off with diversified equity funds with a large-cap exposure.  Again, use only the SIP route.
  • At this point, you can start considering tax-saving mutual funds as well, for your Section 80C benefits. Until then, use other tax options such as PPF, EPF and some basic term insurance and medical insurance for your tax benefits.
  • By the time you are over 3 years into your career, you may start having specific goals such as saving to buy a property, upgrading your lifestyle with consumer durable products, saving for your own marriage, or investing for your retirement or for your family’s needs – such as child’s education.

At this juncture, you can have a well allocated portfolio of equity and debt funds. This may have liquid/ultra short-term funds for short-term requirements and a combination of equity and income funds for long-term goals.

Please note that you may even begin this whole process with a good asset allocation strategy, if you already have fixed goals in mind, have an idea on how to go about it, or have the right guidance. Otherwise, the above will be a more phased approach.

The biggest advantage with mutual funds is that it allows you to ride different asset classes (equity, debt, gold) using the same vehicle. Hence, it becomes easy for you to have an asset-balanced approach once you start investing towards specific goals.

Happy investing!

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