Investing in mutual fund shouldn’t be as tricky as it could be perceived by new investor. Each Asset Management Companies (AMCs) offers multiple schemes with varying combinations of risk-return, investment horizon, exposure to different asset classes and tax treatment etc.
However, investors should choose schemes wisely depending upon their risk taking appetite and investment horizon.
It doesn't matter whether you are new to investing in mutual funds or a seasoned investor, the following key mantras will help you make the most of your investments in mutual funds.
1. Always stay true to your risk appetite
Every mutual fund scheme is unique and carries its own amount of risk, based on underlying securities and investment methodology. Investors should therefore be thorough with their investment objectives and risk appetite. There are a range of schemes with varying risk parameters. For example - Investors choosing equity mutual funds will experience the highest risk while liquid fund investors carry the least risk. It all boils down to the choice that an investor makes. Hence, choose a scheme that matches your own risk appetite.
If you are not sure about your risk taking ability, you may follow simple asset allocation strategies for different risk profiles
2. Be clear about goals and invest accordingly
Investors should read the scheme related documents like SID (Scheme information document) and KIM (Key information Memorandum) in order to understand the objectives of a scheme, its past performance and the ideal time horizon. Based on the facts from these documents, investors should ensure that they invest in a scheme that have more chances to offer the best return in time for their goals. For example - An investor should choose equity mutual funds if he/she prefers long-term investing with at least five years of investment horizon.
You may like to read five life stages of investing
3. Become disciplined
At the onset, an investor should consider a financial plan before investing in mutual funds. They should invest according to the financial plan. Investments made in the long-term have proven to generate better returns when compared to shorter tenure investments. Investors can choose Systematic Investment Plan (SIP) route to become a disciplined investor and to start investing every month. Investors get to benefit from rupee-cost averaging as they invest in every high and low levels of the market.
But before investing in SIPs you must know its benefits and should also check which are the best dates to do a SIP?
4. Remain invested and do not try to time the market
There is a general rule that one should ‘buy at low levels and sell at a high’. However, an investor doesn't know what exactly these levels are. Remember, for an investor it is almost not possible to time their entry in the market. So, one golden piece of advice is to invest early (and regularly) and remain invested to ensure that your money gets enough exposure and time to grow through compounding. Try not to churn the portfolio unless necessary and stay invested particularly with mutual fund systematic investment plans
5. Diversify for more exposure
There are several opportunities in the mutual funds to diversify your investments. Investors can choose from different types of funds including index funds, diversified equity funds, large-cap fund, mid and small cap funds, global fund of funds, sectoral funds, commodity-related funds etc.
Other than equity funds, there are entire gamut of debt funds which helps you invest for few days to few years. Therefore, choose funds wisely based on your asset allocation needs since there are ample baskets for all your eggs.
Read more about how to select mutual funds based on your investment needs
6. Do not be lured by NAVs
There is a common perception among the investors that the absolute value of a mutual NAV, as in stock prices, is an indicator about the quality or performance of the scheme. Investors should stay away from such information. Understand that a NAV is only the function of the total asset under management and the no. of outstanding units. Hence, you shouldn't say that a scheme with a NAV of Rs.10 is better than a scheme with an NAV of Rs.100, just by looking at the NAV of the fund. Consequently if an investor invests during a New Fund Offer (NFO), it does not mean that they are buying low.
7. Dividends are not bonuses
All the mutual fund schemes offer dividend plan option. An investor shouldn't get lured to a scheme simply because the scheme has declared a dividend. The NAV of the scheme reduces accordingly once a scheme pays out a dividend. Hence, it simply means that dividends are paid from the investor's own holdings. It is ideal to invest in growth plans which are considered perfect for long-term capital appreciation, unless it is imperative to receive dividends for meeting your regular income needs.
Would you like to know which is a better option: dividends or growth
8. Consider Balanced Funds and Index Funds in your portfolio
As an investor, you can consider balanced funds to lend some amount of cushioning in case you have a predominantly equity-based portfolio. It will help an investor to meet challenges like market volatility, inflation, interest rates and for achieving diversification. Investors can also consider index funds that are considered as cost-effective mutual funds that help investors get index like returns without active participation of the fund manager.
You may like to read – How to select the best mutual funds
9. Regular Monitoring
This is one of the most crucial aspects that are mostly neglected by investors. Investors should monitor their investments and make it a habit to review the performance of existing funds at least annually keeping their investment objectives in consideration. Corrective action can be taken by periodic monitoring which also helps an investor to stay on track.
10. Never invest without a sensible investment strategy
Even though it is difficult to predict the market direction and the changes in the fast changing markets, investors should be wise and have complete knowledge of their schemes. They should be ready to deal with any market uncertainties and prepare for any volatile times.
Read more on asset allocation and its needs
11. Take help of a financial advisor
As investing in different asset classes can be complex, you must take help of a financial advisor. However, before entrusting your money with a financial advisor, you should research about him or her. One good way is to choose one who charges fee based on a fixed percentage of the assets you have under management. However, there are many financial advisors who manage your investments yet they do not charge you any fee as they are compensated by the principal (For example – Asset management companies if you are investing in mutual funds). The key is to find the right financial advisor who will understand your investment needs and guide you with your investments.
12. Never try to be Over-Optimistic
You should never try to be too optimistic, too confident or too enthusiastic while making your investment decisions. There should be logic in every investment decisions you take. Don't be adamant to hold on to your investments long after they have lost their value due to non-performance, believing that they will deliver a big return some day. In this case you should change the non-performing schemes with the ones which are performing well. It is good to be optimistic but over-optimism is definitely a self-kill.
Read – Are you risk averse: understand your risk capacity
13. Avoid Performance Chasing
Don't be seduced by daily price movements and choose the most attractive investment based on recent performance. Buying a mutual fund without looking at every angle and a detailed analysis is not the right approach in mutual fund investments. An investor should always stick with an investment plan that is well thought out and is in line with your investment goals. Performance chasing can sometimes prove to be dangerous for an investor in the long run.
14. Don't be an Ignorant Investor
You invest your hard-earned money so you must know your investments better than you know yourself. It is not a good sign if an investor act first and ask questions later. There should be a thorough investigation before any investment decision is made. Remember, an investor can eliminate ignorance by spending more time and effort towards being an informed investor.
Investors should regularly keep in touch with the investing world by reading financial and investment blogs, newspapers and magazines and by attending investment seminars etc.
15. Never be impatient with your investments
Don't panic in a fluctuating market condition. Never sacrifice long term growth for the quick hit. Always invest with a common sense instead of hype or industry buzz. You don't need to worry if you have invested your money thoughtfully. Investors should be wiser enough to hold on to their investment to meet their long term goals.
For example – if you have invested for your retirement planning needs which is say 15-20 years away from now, you should not bother if the markets are not doing well now. Having patient with your investments can be very rewarding for you in the long term.
You must learn how to build the perfect investment portfolio for you
Money lying in savings bank account or fixed deposits will not create wealth for you. Investing in market linked investments like mutual funds can help you get superior inflation adjusted returns. However, you must choose mutual funds based on your risk taking ability, investment needs and the time horizon. As long as you can get these 3 things right, investing in mutual funds can be very rewarding to you.
Investors, particularly the new ones should follow the above mutual fund investing mantras for making the mutual fund investment journey more rewarding and meaningful for them.
Did you know how to plan your life goals through mutual funds
Happy investing in mutual funds!
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.