Are you bitten by the investing bug, but intimidated by the stock market labyrinth, have limited financial resources at your disposal and are hard-pressed for time to track the vagaries of the markets? Mutual fund investment may be the appropriate route for a novice investor.
A mutual fund, in simple terms, collects money from various investors and pools it into equities, bonds and other money market instruments.
The professional fund manager takes decisions on investments and money management for the investors, thus taking stress away from the individual investor.1.
Study the Mutual Fund UniverseThere is a myriad of mutual fund options, such as equity funds, sector funds, debt funds, hybrid funds, large cap funds and mid-cap funds.
Equity funds invest in equities, sector funds invest in individual sectors and debt funds put the money in corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.
Hybrid funds invest partly in securities and partly in debt, with the equity component facilitating healthy portfolio returns and debt exposure acting as a defense against market volatility.
Large cap funds and mid-cap funds are similar to sector funds except that they put their money in large cap and midcap stocks respectively.2.
Go for Diversification'Do not put all your eggs in one basket', should be the guiding principle for every mutual fund investor.
A diversified mutual fund portfolio consisting of varied asset classes is ideal for generating steady returns and managing risks in mutual fund investments.
Fund selection should be ultimately based on the basis of investment horizon and risk appetite.3.
Know your Risk ProfileKnow thyself, thus said Socrates; this maxim is a good starting point for mutual fund investments.
An MF investor should know his / her risk profile in order to choose the appropriate mutual fund scheme.
It is advisable for conservative investor to stick to debt mutual fund schemes, while somebody willing to take risks to earn extra returns, could look at investing in equity mutual fund schemes.Ankur Choudhary, Co-Founder - CIO, Goalwise.com, also highlighted the need to know risk profile.
"The first step is to determine one's risk profile as low, moderate or high.
This depends on a number of factors like individual's age, loss tolerance and capacity to take risk.
The second step, according to him, is to ascertain the purpose, target and time duration of the investment.
The final step is Mutual Fund selection.
You can use past 3-5 year returns and peer comparisons to select 3-4 equity funds in the large cap and multi cap category".4.
Have a Time HorizonMF investors should understand their time horizon in order to make the right investment decisions.
Debt mutual fund schemes are ideal for those who expect to hold their investments for less than five years, while equity mutual funds make sense from a long-term investment horizon of five to seven years.
MF investors need to also have a sense of their future expenses.
Investors who expect short-term financial expenses may opt for liquid schemes, which offer ease of exit, while closed ended funds usually carry a fixed maturity period of 2-5 years.According to Johnson Kandi AVP, Business Strategy and Learning KIFS TradeCapital Pvt.
Ltd., mutual funds deliver positive returns if invested for a longer time-period through SIP (Systematic Investment Plan).
Research has clearly indicated that the mutual fund sector provides profitable returns as compared to other investment plans, he added.5.
Take the Systematic Investment Plan (SIP) RouteInvest a fixed amount on a given date every month, is a time-tested advice from investment gurus.
Systematic Investment Plans (SIPs) are similar to a recurring deposit, but for the fact that recurring deposits (RDs) are debt instruments, while SIP returns are linked to equity or debt market performance.
SIP is easy on the wallet as it obviates the need to set aside a lump sum investment amount.
And with a systematic investment plan, there is no need to time the market.
Investing every month ensures that one has bought at the highs and lows.Harsh Jain Co-founder and COO Groww, has presented a five-point program on mutual fund investing, including investing early, investing through the SIP route, diversifying the portfolio, reviewing the portfolio periodically and ensuring that funds are not redeemed in haste.To conclude, all investments carry some risks and mutual funds are no different.
But as diversification is inherent in any mutual fund, one can conclude thatmutual funds are asafer means of riding the inevitable peaks and valleys in the market.Get Breaking news, live coverage, and Latest News from India and around the world on TheIndianSubcontinent.com.
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