Depending on your asset allocation exercise, you will need to build an equity portfolio that may vary from 15%-75% of your total portfolio. Equity portfolio can be built either via mutual funds or stocks. Now the question comes what should be the ratio between mutual fund investment and stock investment?
One dimension to consider is your risk profile. Here is a generic split between mutual funds and stocks that can be considered as a rule of thumb:
· Conservative investor: 80% Mutual Fund, 20% stocks
· Moderate investor: 70% Mutual Fund, 30% stocks
· Aggressive investor: 60% Mutual Fund, 40% stocks
Please note that there is an additional dimension to consider when it comes to stocks. Stock selection requires you to commit a lot of time and energy. You need to upskill yourself first before you invest in stocks. That’s why I would suggest 100% mutual funds for a beginner or a retail investor who doesn’t have time, skills, and resources to choose the right stock.
Here is what you can do as a beginner:
· Start with a monthly SIP in an index fund (Tracking Sensex or Nifty 50). For beginners, it’s very important to control your ego and not buy shares based on tips from YouTube videos, tv channels, blogs, etc.
· Your goal is to preserve and grow wealth at a moderate pace. Hence, starting with a monthly SIP is an index fund makes sense. This will bring discipline and patience in your investing journey.
· It doesn’t mean you can’t/should never actively pick and buy shares. In parallel, you should start reading and learning more about equities, debt, asset allocation, goal-based investing, risk-return dynamics.
· Once you have solid foundation, you can start analyzing company financial statements, ratios, indicators and then buy shares directly. You can make a goal of doing detailed analysis and picking 1 share every quarter.
At this point, you may ask why do i recommend starting with index funds for a new investor?
· Index funds greatly simplify the choice
· Index funds confine to a universe of large cap stocks, which tend to be less volatile compared to mid/small cap stocks and hence doesn’t scare away a new investor
· Once you have gained some knowledge, experience, and skills, you can start to introduce some active mutual funds (multi-cap/mid cap/ small cap) in your portfolio.