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Know the 10 Commandments of Mutual Fund Investing

Aug 13, 2018 / Advisorkhoj Research Team | 97 Downloaded | 5346 Viewed | |
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You may have heard it many times when you are in the world of mutual fund investments - "Don’t time the market, steer clear of greed and envy, and be prepared to wait".

Investing smartly in mutual funds may sound harder than it really is. We have made your job easier with the following Ten Commandments of Mutual Fund Investing. These commandments have been followed by many legendary investors like Benjamin Graham and Warren Buffet, who have used these to create great investment success. You can do so, too!

1. Be patient for the long term

The stock market is a device for transferring money from the impatient to the patient.” Warren Buffet once said.

You need to give time when you’re confident about your mutual fund investment choices. Investing in some mutual fund schemes, especially equity mutual fund schemes, can take time to generate decent growth. Of course, there will be times when you may end up seeing your equity mutual funds giving negative returns or even failing to deliver expected returns, but these are the times when you need to be patient and wait for the market to turn in your favor. Remember, equity mutual funds take time to appreciate in value. You should have minimum 5 years of investment horizon for equity mutual funds. The investment horizon could be even more if you are investing in mid and small cap funds or thematic/ sectoral funds.

See how equity mutual funds have performed in the long run

2. Do not ignore the fact that equity markets are volatile

Nobody can predict how the equity market is going to behave. Since the stock markets has always been a volatile one, your equity mutual fund investments may go up or come down based on market movements. This may cause fear in your heart, but you need to maintain calm believing in the fact that equities as an asset class is the best performing one compared to any other asset classes.

Did you know how to follow asset allocation in market cycles

However, the same volatility could be exploited for gain if you as an investor can follow asset allocation strategies based on your risk taking ability.

Read more about what you should do in volatile markets

3. There is no ‘Best Time’ to invest

There's a popular Chinese proverb that say - The best time to plant a tree was 25 years ago. The second best time is now.

There isn't any perfect time to invest and as an investor you shouldn’t wait for a perfect time to start it. You first need to know what your long and short term goals are and start investing accordingly. Once you are focused on achieving your goals and ready to start investing according to it anytime is the ‘best time’ to invest. Continuing with your investments without waiting for the ‘best time’ is the key to long term success in investing.

In the last 10 years there have been very bad times and good times in the market and had you continued your investments you would have made superior returns compared to any other asset classes.

Did you know NIFTY 50 TRI Benchmark has given over 13.5% returns in the last 10 years!

4. Never waste time guessing market tops and bottoms

It may be your dream to buy at the bottom and sell at the top of the market. However, as all dreams go, this dream is also near-impossible to achieve. As an investor, if you can follow a more realistic and achievable approach by selecting good performing mutual fund schemes for your investments, your job is done. A recipe for happy investing is to stay invested over the stock market cycles and eliminate unnecessary punting. This strategy ensures that you make wealth in the long run.

There is a proverb, time in the market is more important than timing the market. You can make more use of your time by studying mutual fund investment strategies and finding new ways to invest instead of trying to time the equity markets.

You must read why equity is the best performing asset class in the long term

5. Have a look at various mutual funds

You need to put in a lot of effort if you are trying to pick the right mutual fund schemes even though you’re not trying to time the market. This process becomes even harder if you are someone who is not good with knowing various schemes. This is when you need to look at the various categories of mutual fund schemes and the solutions offered by them.

Various categories of mutual funds help you choose schemes based on your investment objectives and risk profile. While, there are is debt mutual funds which help you get better than fixed income returns, there is various kind of equity mutual funds which can help you save taxes or achieve your long term investment goals. Again in equity mutual funds, there are large cap or hybrid equity funds which is suitable for moderate risk profile investors, mid cap or multi-cap funds for moderately high risk takers and small cap, thematic or sectoral funds for high risk takers.

You can read which mutual fund is best to invest in lieu of fixed deposits

In a nutshell, if you have a good knowledge about mutual fund categories, you will find solution for all your investment needs.

6. Invest systematically

There is an ideal way to invest in mutual funds and that is via Systematic Investment Plans or SIPs as they are popularly known. You can invest a fixed amount in mutual fund schemes of your choice, on predetermined dates every month. This not only helps you to become a disciplined investor and reduce some of the stress associated with timing the market, it also help you save for your long term goals brick-by-brick.

Read what are mutual fund SIPs and its benefits

7. Avoid investing on basis of high and low prices

There are instances of investors selling their mutual fund holdings when the market goes down fearing that their investments values will correct further. There are also instances, when investors buy mutual funds aggressively fearing that they have missed the good run up and so they should immediately accumulate units at the current market prices.

As an investor if you invest based on low and high prices (known as NAV) of mutual funds then you may often miss out on the opportunity to generate even more gains. It is important to stay invested in a mutual fund scheme as long as it is giving good returns and meeting your investment objectives.

Low and high NAVs are just numbers, your focus should be on earning returns and not attempt to buy schemes with lower NAVs and avoid schemes with higher NAVs.

While on the topic of high and low prices, we suggest reading mutual fund investing misconceptions

8. Focus on investment goals

In the world of investing, you will always see fluctuations in stock prices, which may be exciting for some investors and terrifying for others. However, you should ensure that your investment decisions don't rely on these ups and downs but rather on your investment goals. It is advisable to stick with your investment goals following various investment strategies while understanding that there will be fluctuations in the market movements.

Sticking to your investments and aligning them with your various goals could be passive investing and boring but that is the only way to create long term wealth.

9. Envy could be the enemy of investing

Never make your investment decisions out of envy. You should know that your investment objectives and goals are most likely different from other investors and emulating the strategies of other investors in the hope of making a quick gain will land you nowhere. It may so happen that the investors you follow may have timed their investments well, and it will be a sound idea to do what they did now.

You should always take time to think hard before making any investment decisions which should be based only on your needs and not what others are suggesting or currently ‘trending’ in the market.

Chances are that your colleague or neighbor had made a killing in one of their investments but that does not mean you will also attempt that! You should not focus much on return but on outcome of your investments. As long as your investments are meeting your objectives, you should be happy without envying others.

Read how to select best mutual funds: lessons from football

10. Think of an emergency funding first

Generally, the basic principle of mutual fund investing is to invest something today for a better tomorrow. However, you need to be cautious since investing too much for the long term can hurt you in the short term particularly when you need funds in an emergency. Example - when you need liquidity to pay a hospital bill and find that all your money is locked up in funds with long term investment objectives.

To achieve short and long term investing success, you should first keep aside a percentage of your savings for contingencies. You should always invest for long term only after setting aside for contingencies. Also remember that equity investments also suffer periodic declines in value and your emergency fund can also help accumulate further investments when the going is not so good!

Did you know the 5 reasons why you should invest in mutual funds

Conclusion

You should start investing with these principles, which can go a long way toward building a successful and healthy mutual fund portfolio. Your long term goals, changes in taxation policy and your monthly investible surpluses should be kept in mind when planning your investments — for instance, the change in long term capital gains tax in equity mutual funds. Always remember that an investment strategy which is based on these sound principles can grow more rapidly than you think.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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