Which MF works for you: Refer to PN Vijay's guidebook

Investments are all about matching risks and returns. Investors worry too much about returns but risks are also important. CNBC-TV18's special show Informed Investor gets PN Vijay, Portfolio Manager of askpnvijay.com to guide which type of mutual fund suits a young investor who has just started his earnings.

Vijay advises, "Ability to take risk depends on two factors; how much money you get and how much goes out. You must have some cash surplus. Normally you don’t make investments and then use it for daily bread."

Here is an edited transcript of his comments.

Q: What investment advice do you have for people who have just started earning? What steps should they take?

A: Investments are all about matching risks and returns. People think too much about returns but risks are also important. Your ability to take risk depends on two factors; how much money you get and how much goes out. You must have some cash surplus. Normally you don’t make investments and then use it for daily bread.

Second is age. when you are young, your income is good and that is the time to build wealth, build assets. In a country with 8 percent inflation it cannot lower than 6 percent because there is so much of growth and consumption. So many people are coming up the ladder. It makes sense to slowly build-up the portfolio of good property and good stocks because these are the only two assets where you can get inflation to work for you.

Q: A lot of people do not review their portfolio investments often and suddenly they loose a lot of value. What should they do at that point? Keep the faith or should they do something to asses their position?

A: Surely keep the faith. The thing about mutual fund is like asking whether dating a girl is good or not. A girl can either be most wonderful or most awful. This mistake I find not only in a young investor but also in experienced ones as well. I have invested in mutual funds and have lost a lot of money. Now mutual funds can be the safest. If you are in a liquid fund or a fixed maturity plan (FMP) it is the safest. It is money in the bank. If you have invested in small cap sector fund it is the riskiest. So, mutual fund is a generic name.

Equity mutual funds, sectoral mutual funds, diversified mutual funds and to some extent balanced mutual funds are exactly like equity shares. FMPs, liquid funds are exactly like bank deposits. You get certain tax benefits and certain other things, complications but generally income funds swing with interest rates. It is important to look at your mutual fund portfolio.

Find out how much risky is equity, how safe is debt and make the choice, within that choose some good mutual funds. But on a personal note, I prefer well picked portfolio, diversified portfolio of stocks better than intermediation of equity mutual funds because the cost of that intermediation is somewhat high.