How To Start Investing In Mutual Funds?

When you begin investing in mutual funds for the first time, you must take each step with a lot of care. Your initial experience must be pleasant so that you feel encouraged to keep on investing for your entire lifetime.

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Limit your equity allocation

Of the total amount you invest in mutual funds, only a certain portion should go into equities. A higher equity exposure means you have the potential to earn higher returns, but it also means your portfolio will be more volatile. Since you are a new investor, you should not overestimate your risk appetite. Remember that the pain caused by loss is felt three times as acutely as the pleasure felt upon making a similar amount of gain. You will only know your true risk appetite in the midst of a bear market. Until then, you should be conservative and take only a moderate amount of equity exposure. So, if you are investing Rs. 100, it would be advisable to invest not more than Rs. 50-60 initially inequities.

One rule of thumb that is applied for deciding equity allocation is 100 less age. So, if you are 30 years old, the rule of thumb says that you may allocate 70 per cent to equities. However, we would suggest that it is better to err on the side of caution and allocate less initially. Later, as you become more accustomed to the volatility of equities, you can hike your exposure to this asset class.

Allocation to fixed income and gold

Once you have decided on your equity allocation, it is easy to decide your overall asset allocation. If, for instance, you have decided on a 60 per cent allocation to equities, then gold can make up another 10-15 per cent of your portfolio. This means that debt or fixed income will make up the balance of 25-30 per cent of your portfolio.