New mutual fund investors: Set goals and assess your risk profile

The number of unique mutual fund investors is up from 37.9 million in April 2023 to 45.2 million in April 2024, an increase of 19.3 per cent. A poor experience early in their investment journey could turn many of these newcomers off equities for a long time, which is why they must enter the market cautiously. Many investors enter the markets with unrealistic expectations. They expect that history will repeat itself and they will earn very similar returns over a short period.

Many are investing only in mid and small cap funds, without realising that returns tend to be cyclical. Many do not have an inkling of their risk profile. They do not know whether they are conservative, moderate or aggressive investors and hence are not in a position to select a suitable fund. Another common fallacy is investing without setting a financial goal. Such investors are clueless about their investment horizon. During bull markets, all investors are avowed long-term equity investors.

Many novices think that equities are giving a return of 12-14 per cent over long term, then why invest in debt. One should look at the long-term of 10 or 15 years returns of a fund category and have similar expectations from it. Investors must know their financial goals, risk profiles, time horizons and they should decide their asset allocation accordingly. Portfolios must be diversified across equities, debt, and gold. Around 10-15 per cent of the portfolio may be allocated to gold. The balance may go into debt. Allocation to debt acts as a cushion when equity markets fall. A debt allocation also allows investors to rebalance from debt to equities, when the markets are down. Allocation to equities must be for at least five years. Finally, staying invested for the long term is the way to make money in equities.