Are you planning to Invest in Mutual Funds?

Are you planning to Invest in Mutual Funds?

05 Jun 2018

If you have plunged into the market with little or no research or if you are planning to invest in mutual funds, you must read this blog. Mutual funds earn money by investing funds in different avenues. Mutual funds enjoy the advantage of lower transaction costs because the volume of transactions is high. You will always have a diversified portfolio of funds if you are a mutual fund investor. Fund houses invest money in various types of investments, sectors and companies. Mutual funds are a better option for you if you are a beginner to the stock markets.

It is important for you to analyze the companies that are considered for investments by different mutual funds. Most fund houses offer products in three categories: Small Cap, Mid Cap and Large Cap. Simply multiply the current market price of a company by the total number of shares and you will get the market capitalization of a company. The current market situation and your appetite for risk help you to know funds that are good for you. Various risks are involved while considering small cap and mid cap funds. This is because the former invests in startups and smaller, less established companies. The benefit of large cap funds is that they invest in reputed companies with substantial profits. Some of the popular Mid Cap funds in India are Sundaram BNP Paribas Select Midcap, Kotak Indian Mid Cap Fund and HSBC Midcap Equity Fund. Large cap funds include HDFC Top 200, Reliance Growth Fund, Kotak 30 and UTI Large Cap Fund.

Here are five things you need to know about yourself before making investments in mutual funds.

Know Your Risk Profile -

Before pooling your money in mutual funds, one should understand the amount of risk he or she can take. For example, investors with higher risk appetite might prefer riskier asset classes with higher upside potential to reach their goals sooner while those with low or moderate risk appetite would prefer to trade-off growth potential for capital protection and hence require a higher contribution for achieving their goals.

Decide the Goal and Monthly Saving Targets -

To decide efficient savings, you need to understand two things first, how much you should save for investing and how much you would need for your specific goals. This can be done by finding the future monetary value of each of your financial goals after considering the time horizon and inflation rate. Once you have those future monetary values, you can take the help of SIP calculators to find out the monthly contributions required for achieving them.
Example: I need Rs. 40 Lakh for my child's education after 12 years. If my funds are performing at the rate of 15% per annum, I should save at least Rs. 9,911 per month.

Define financial goals clearly with time frame -

You need to define your specific financial goals which may be self retirement, child's education, house purchase, etc. and accordingly, you should make the selection of the most appropriate scheme/s. Since the goals are planned for a longer term, taking a decision on scheme selection requires good analytical skills. Further, select the schemes as per your risk-taking appetite. Doing so may require you to shift your goals time horizon a little bit which in turn will help you in maintaining the consistency in your investments throughout the tenure. This happens because returns vary from scheme to scheme and the category of funds they fall into.

Consistency in MF investments -

When it comes to choosing a mutual fund scheme, investors generally look for the top performing or star-rated schemes. However, investors forget to analyze their own consistency i.e. how much longer they will be able to remain invested. Therefore, investors should first ignore the short-term performance or the long-term performance consistency but look out how they can remain invested in a particular fund once opted until the time of achieving their financial goals successfully.
Ideally, investors should take a Systematic Investment Plan (SIP) strategy to route their money in mutual funds. This helps them get the benefit of rupee-cost averaging as well as the power of compounding when invested for a longer term of about 15-20 years.

Investor should review their portfolio in a timely manner -

Investors should identify the changes in their financial goals, risk appetite, fund's fundamental attributes and macro-economic factors, and re-balance their portfolio accordingly. Investors should ideally review their mutual fund portfolio at periodical intervals, at least once a year. The periodic review would also allow investors to identify under-performing funds and correct deviations from their original asset mix. Funds under-performing their benchmark indices and peer funds for 3-4 consecutive quarters can be considered as under-performing funds, and should be redeemed in favour of better-performing ones.
To conclude, saving helps in making a better tomorrow and makes you financially secure. Mutual Funds are best to create long term growth-oriented wealth, but make sure that your money is headed in the right direction and if you are a novice investor, then you should ideally take suggestions from a recognized or certified financial adviser/ planner.

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