Important Tips to Invest in Mutual Funds
Mutual fund is an investment tool which pools money from many investors to purchase securities. Mutual fund investments have become a very popular investment tool in India in last 10 years and the AUM is growing too fast. According to AMFI, there are currently Rs25 trillion of AUMs with an investor base of 20 million. It becomes a little cumbersome for the investors to choose from the various types and schemes available in the market. So in today’s article we are giving 7 important tips on mutual fund investments:
Identifying your Goals
The first and foremost thing to do before thinking of investing in mutual funds is to identify your goals and the time to reach that. You can have various kinds of goals including Child’s higher education, buying a house, buying a car or maybe an overseas holiday. For an example, you want to save for your child’s higher education which is going to be in 20 years from now than you can have a SIP of Rs10,000 for 20 years at an assumed rate of 12% return p.a. and translating into 1 crore at the end.
Understanding of Different Types of Mutual Funds
After you have identified your goals, what needs to be focused on is understanding of various types of mutual fund schemes in the market. There are debt funds, equity funds, hybrid funds, index funds, liquid funds and many more. Understanding of these fund’s and where they invest the investor’s money is very important for the investor. This will help an investor to choose the right mutual fund which matches with the his risk profile.
An investor needs to know his risk appetite i.e how much risk the investor can handle. His risk appetite will depend upon number of factors such as age, marital status, income, dependents and his future goals. An investor can get higher returns in mutual fund but with higher risks only. So assessment of risk tolerance should be done to invest in funds that will eventually help to choose the right fund suitable to his needs.
Choosing the Right Mutual Funds
The investor needs to spend a fair amount of time to research about the various mutual fund types and schemes that aligns with his goals and risk preferences. One should research about the following things while choosing the right mutual fund:
- Ranking of Mutual Fund
- Past Performance
- Expense Ratio
- Duration of the fund
- Tax saving benefits
- Fund’s Performance against Benchmark
- Knowing about Asset Management Company
- Fund Manager’s Experience
An investor has to consider these things before parking their savings so that he can earn returns that aligns with his needs and financial goals.
Also Read: How to invest in Mutual Funds?
Diversifying your Portfolio
As there is a popular saying “Don’t put all your eggs in a single basket”, an investor needs to diversify his portfolio so to cover against the possible losses arising out of investments. Allocating your investments in different classes of mutual funds such as equity funds, debt funds and liquid funds that are for very short periods helps to protect an investor from potential losses that can come from any of the asset class and thereby covering that losses from profits in other funds.
Don’t Rely on Past Performance
One thing that needs to kept in mind is that the past profitable performance of a fund does not indicate or guarantee you that it is going to give a positive return in future too. So while doing research, an investor should not just get lured by the past performance of the funds and also give attention to the emerging funds that have grown in their value recently , carry the growth potential with them.
Monitoring the Performance
After the investments have been made, the investors need to check periodically or depending on his types of investments, his mutual fund portfolio and be updated about the fund’s performance. Rebalancing the portfolio periodically will help the investors to be in line with the target portfolio. An investor should try to be updated with latest market trends and developments in the financial market to make better decisions regarding buy/sell for his mutual fund portfolio.
With these 7 important tips for mutual fund investment, you can choose the rights funds and allocate well suitable to your risk preferences/tolerances.