I am in my 40s and new to mutual funds. How do I choose mutual funds for my long-term financial goals?

This is a very common question many new investors have in their minds. Good to see that even people who are late starters for mutual fund investing now want to want to start investing in mutual funds for their long-term goals. 

But kindly understand the selection of mutual funds comes at a later stage in a financial planning process. At the time of investing there are plenty of things, you need to keep in mind other than mutual fund returns or their star rating on famous portals.

First understand that in mutual funds there are 2 main types:

Debt mutual funds and Equity Mutual funds.

Both these funds have their pros and cons as well as are used for different purposes. But for achieving a financial goal you may need both of these. So try to do a blend of both these types to minimize the risk and also earn a decent return. This strategy helps you as you are having a moderate risk-taking ability.

Now you need to keep in mind the following points

1. Set your financial goals and their duration first.

2. Divide them into short, medium, and long term according to the duration of those objectives

3. After this split, decide the asset allocation ratio for each of your financial goals based on your risk appetite

4. After all these steps, choose the suitable financial instruments for investing.

Now after taking these points into consideration, the next step is to construct your portfolio. The equity portfolio should be constructed based on the “core and satellite approach” where your major portion is invested in those mutual funds which provide you a decent return with minimum risk and a small portion is invested in those MFs where the possibility of earning a higher return in long term.

The selection of mutual funds depends on many factors such as

Term to your financial goal,

Nature of the goal,

Risk-taking ability of the investor

# Mutual fund and AMC’s track record,

# Whether the philosophy of this particular fund matches with the investor and the goal required,

# Mutual fund manager’s skills and experience,

Expense ratio of the fund

# The performance of the fund in bull and bear market both at least for last 7/10 years.

# As well as downside protection it can offer in a bear market

I give importance to the above-mentioned points than star ratings as these ratings are very subjective as well as sometimes misleading.

But before starting investing kindly set aside adequate emregency fund which should be parked in liquid assets. Once it is done you can start investing as per the asset allocation ratio between equity and debt as 60:40 for the long-term goals as kids’ education marriage planning as well self retirement if the goals are 12+ years away But if you are new to mutual funds and sole earner then follow the 50:45 or 50:50 ratio.

  • If your goal is 10 to 15+ years away

You can invest in the following proportion in these assets

5% gold, 5% cash, 35% in debt and 55% in equity

  • In the Equity asset class, you can have
    • 5–10% direct equity exposure but only in bluechip stocks as per your risk profile and desired exposure only if you have knowldge or stock picking or else stick to mutual fund investment only.
    • Rest 95–90 % of equity portion you should invest in Equity Mutual Fund as the following proportion
      • 50% in an index fund
      • 30% in flexicap fund
      • 20% in an aggressive hybrid fund (as you are moderate investor)
  • In the Debt asset class, you can have
    • Invest in Bank Fixed Deposits or National Saving Certificate and Kisan Vikas Patra if you are a defensive investor
    • invest in Debt Mutual Fund as following
      • For 10 years term horizon, you can think of going for a 10-year gilt fund but as this is interest risk-sensitive better you be there up to maturity. Better to stay away from it, if you have EPF/VPF/PPF and SSY for long-term debt products.
      • and rest in arbitrage fund as well liquid fund. Do not go with short term debt fund as they too are interest-rate sensitive and carrying credit risk
  • In the Gold asset class, you can have
    • Sovereign gold bonds (SGB bonds)
    • Gold ETFs
  • You can hold Cash in the form of
    • Bank balances, Rds
    • short to ultra term government bonds
    • money market debt funds

Hope this way you can construct your mutual fund portfolio.

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