There is no doubt that mutual fund investments are flooding the market at a rapid rate. It seems that the catchphrase “Mutual Funds Sahi Hai” has encouraged a new wave of investors. Besides existing retail investors, new and inexperienced investors are also parking their money into mutual funds.
For, everyone wants to invest in mutual funds with a view to earn high returns, but before doing so, there are many things you should be careful about. Mutual funds beginners need to know few things to help them make a right decision.
If you are planning to make a mutual fund investment, keep these things in mind:
- Link Your Investments to A Financial Goal
Right from the beginning, make it a habit of linking your investments to a particular financial goal and choosing your mutual fund scheme accordingly. This will help you time frame the redemption of the appreciated capital achieved over a particular period (which corresponds to your financial goal’s time period).
Pro Tip: Invest according to the time frame of your goals. For instance, as you get closer to retirement, reduce exposure to stocks to preserve your capital.
- Know Your Risk Appetite
Mutual funds are designed for every type of investors. For instance, if you are a high-risk investor with long-term goals, you can choose to invest in equity funds. As a newbie, you may choose balanced funds or large-cap funds which are less volatile. Whereas a conservative investor may opt for debt-oriented funds such as liquid funds or short-term funds.
However, before making any mutual fund investment in equity, debt or hybrid funds, consider various factors that may affect your risk-taking capacity in the future.
Pro Tip: Ask yourself few questions like – Is the scheme selected is suitable for me or not? Do my liabilities allow me to invest in a risky scheme?
- Go for SIP Instead of Lump Sum Investments
For any novice investor wanting to invest in equity or equity-oriented fund, Systematic Investment Plan (SIP) can be a sound option (compared to lump sum investment). The reason is- SIP allows you to spread your investments over time and invest at different market levels. On the other hand, making a lump sum investment can put you at the risk of catching a market peak.
Pro Tip: The benefit of rupee cost averaging that comes with systematic investment plans helps you earn higher returns over the long-term.
- Choose the Right Fund Type
To decide on a suitable mutual fund category, it takes more than just reading about different fund types. With hundreds of mutual fund schemes available today, you need to select the scheme that has performed well consistently in the past.
Pro Tip: Past performance should not be the only judging criteria. Don’t forget to consider other factors like expense ratio, fund manager’s credentials, assets under management, and portfolio components while at it.
- Diversify Your Portfolio Well
Along with a proper asset allocation, it is equally essential to diversify over multiple funds within each asset class as well. For instance, under equity funds, diversify the portfolio over large-cap, mid-cap, and multi-cap funds. In the debt category, invest in a mix of short-term and long-term debt funds.
Pro Tip: Diversification does not mean investing in 15-20 different funds of the same asset class. The key is to focus on being sufficient, not excessive.
- Keep in Mind the Tax Implications
Only schemes that allocate over 65 percent of their assets to equity qualify as equity funds. And the gains on debt mutual funds and equity mutual funds are taxed differently.
Pro Tip: Long-term Capital Gains (LTCG) on equity mutual funds are tax exempt. For non-equity funds like debt funds, LTCG tax is chargeable. Hence, keep the tax factor in mind before investing and while redemption of mutual funds.
- Don’t Ignore the Costs
Many individuals tend to ignore the cost of a mutual fund investment. Remember that all mutual fund schemes charge an expense ratio towards distribution overheads and fund management. On an annual basis, this ratio can range from as low as 0.10 percent to as high as 3 percent depending on the type of mutual fund scheme you choose.
Pro Tip: Most equity funds charge an expense ratio in upwards of 1.50 percent.
With all these tips in mind, be ready to take the much-needed mutual funds plunge. Make the most of your investment debut with a carefully curated mutual funds scheme.
However, if all this seems too much of a task to do, it would be prudent to consult mutual fund investment experts. After all, you do not want your hard-earned money to be wiped away because of negligence.