Investors' Hangout: Best funds to start investing

First of all, can we begin today's interaction by listing out factors that one must consider before they start investing?
Sure, but before I do, I would like to address all those people who have been regular at Value Research Online when watching this: we always think in terms of constants that we started doing a Rs 10,000 SIP, Rs 5000 SIP, and SIP has become quite a popular thing. You fall into the habit of continuing with it, but one very critical thing, which people often miss out on, is that you should increase your SIP amount and you should increase it depending on your situation. If your income has gone up, so should your SIP, and it can go up even more if you have been able to clear a part of your debt. If you have more free money, which can be invested, look for an opportunity and an excuse to increase the amount of SIP. The earlier and the faster you do it, it has a disproportionate payoff when you do it early.

Now coming to the very basics, the first question: how should people go about choosing it? I think the most important factor, which any investor should keep in mind is not something which has to do with the market or the investment opportunity or a great opportunity or a great bargain available; none of that. It is your timeframe. And it is your comfort with the ups and downs of the market. If you are new to the market and have not been used to the ups and downs, be conservative, be with relatively stable assets, which you can withstand. And second, if you're investing for the short term, never invest in equity; only consider equity for the long term. So, this is a critical element. If most investors keep this in mind, they will be okay; they will get used to it; they will benefit from it, and they will profit from participating in market-linked investments.

So once all of this is clear, the next step is there are so many mutual funds; how to go about choosing the right one for oneself?
Choosing a kind of fund could be complex because there are 32 kinds of official categories of funds. But you can do without looking at or learning about most of them.

When it comes to investing, the most important thing is something which only you know: if you're an investor, you know if you're going to invest for the first time, what is the likely timeframe in which you need the money? What has been your experience because a lot of people also learn from other people's experience, your father or your brother, if they have been investing, and you have seen the ups and downs and gotten used to it, then it's a different story. Likewise, understanding the value of diversification, and understanding the value of equity.

A few things matter when it comes to investing. One is choosing the right vehicle and having the right temperament. Having the right temperament is a matter of time; you have to build one if you don't have one. And that takes time. If you're investing for the short term, a couple of years, and you definitely need the money for a non-negotiable goal, or if it is even closer, in six months to a one-year timeframe, you intend to buy your house, and you have been able to accumulate that money, then maybe take that money out, keep it in a short-term debt fund. That's fine; money within three years, you can well consider a short-term debt fund. You will be insulated even from violent interest rate movements.

And when it comes to investing for the long term, then you should consider a vehicle which depends, you can choose the aggressive hybrid fund or a multi-cap fund or an index fund and a mid-cap fund small-cap fund combination depending on your experience because you have to keep in mind two to three things. One is that your goal is to seek diversification. Your goal is to spread your money over a period of time so that you are able to reduce the risk of catching a market high, understanding the expense, and making sure that you are able to reduce your expenses on fund management is also a very important goal because investing in large caps, one should invest in an index fund. And that is a short way of saving money. And so, I would say that you can get more sophisticated over time, keep it simple to begin with, be conservative to begin with, and then there is a ladder, which you have to climb steadily. So all you can do is ensure that you are disciplined enough to begin with, and if you decide to invest in equity and in mutual funds and do your SIP, and make sure that you're not investing any money which is required within the first five years, you're fine; you will be sorted. Even if you go wrong with your fund selection, you will still be well taken care of. And while zeroing down on one particular fund, one can always go to Value Research or compare the fund with its peers and decide on it.

Now, if someone has been investing for a few years, say three to four years, what would be the right fund for him to invest in? And should he venture into index funds and ETFs as well?
I would say that if you have been investing for three, four years, and you have kept a mainstream fund, whether it be a flexi-cap or multi-cap or index fund or a tax-saving fund, that is also a great thing to begin with, and most of them are diversified vehicles. Last three, four years have been very eventful. If you have seen the COVID decline of 2020, then you understand that it is scary, but it is rewarding, and how you can actually enhance your reward. But I would say that if you're doing this with a multi-cap, flexi-cap, and things like that, you're fine. You don't need to do anything extraordinary. If you want to bring in some element of novelty, which has also the performance potential, but some of those vehicles are coming to an end because SEBI has restricted the investment in those ETFs which invest abroad because they have hit their ceiling. And then when it opens up, consider those because diversifying geographically could be an important objective.

Next is that you can add small-cap or mid-cap or a micro-cap index fund, just to bring a flavour of the potential of enhanced return. Don't look at investing for excitement, but consider those to potentially reward it, but do it in a measured way to a tune of 10 per cent to 15 per cent; be watchful.

Viewer's question
Sandeep Kadian asks, "Are we about to witness a mutual fund bubble burst in the near future?"

This is a question which I keep getting. And this is a very important question because our general belief is that everything is cyclical: what goes up comes down. And that is largely true. But not in the case of a diversified equity scenario. That doesn't mean that markets will keep going up only. We have seen that, last week, the market went down. Three years back, the market went down dramatically, for a period of time, the market doesn't go anywhere. But despite all this, what we keep saying is that when you invest with a five-year timeframe in mind, then the market generally, almost always, goes up. And that is something which you should keep in mind. And I don't think it is as much of a bubble; of course we never get to know that it is a bubble till it bursts. If we are in the middle of it, it is very unreasonable to expect from me to figure it out. And so, I really won't be, but I'll tell you why I think that it may not be a bubble because there is a possibility that a segment of the market, which could be very pricey, there could be a bubble, and there could be a factor that will be driving it; there might be a lack of supply or great demand for that, or small companies' stock prices have gone up simply because too much money is coming into small-cap and mid-cap. But the fact is that if you're diversified and if money is getting invested for the long term, some of these companies will die, some of these companies will thrive, some of these companies will muddle around and that is why you actually have a diversified portfolio. And that is what actually makes sure that you never lose money if the bubble bursts. Think long term, and why I feel another reason why it may not be a bubble is because this time around, for the first time in the last 30 years, it is entirely driven by a large number of individual investors investing for the long run and investing gradually. It has never been like this; either the market was sometimes driven by FII, or IPOs or NFOs, where people came with unreasonable expectations, huge expectations, and when they were disappointing, they ran for cover, they ran away back with their money. Now, with this fear that they will never come back to the market, and that was largely true. This time around, people are coming; they're investing, and they're investing month after month, and it is a gradual thing, which is warming up, and I think it is still the beginning. And the factors which are driving it are still gaining strength; it is basically the democratisation of cell phones, smartphones, it is democratisation of investment because of Aadhaar, UPI, digital banking. So, it is the ecosystem which has evolved, and that has democratised, and it has reduced the cost. So, I think if it is a bubble, then the big foundations on which it is being built, it is going to be a very durable bubble.

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