Talk about investments and the first name that pops in your mind is mutual funds. Mutual funds are one of the most popular investment products in the market. They are suitable for all age groups of investors depending on their risk profile. Investors also get the benefit of investing either a lump sum or through SIPs to gradually build their portfolio which is an added advantage for the investors.
However, it is essential to know some key pointers while starting an investment in mutual funds especially for beginners who may have limited knowledge about mutual funds. Given below are a few basic investing pointers that can guide you while making effective investments in mutual funds.
Key points before investing in mutual funds
There are certain basic pointers that have to be considered while investing in mutual funds. These pointers can ensure that investors can make informed and most accurate decisions to maximise their returns as well as make investment decisions that are in line with their objectives.
Set your investment goals
Investing all that you save may seem like a good idea but it is very easy to lose focus in such investments. So it is good to tie your investment to a goal like buying a house, paying for your kids’ education, your retirement, etc. So that you know what you are investing for.
Assess your risk appetite
The second most crucial step is to know your risk appetite. A correct estimation of the risk-reward ratio will be of great help in choosing the funds that match your profile. This way you will not be thrown in the deep end and can also have a balanced portfolio. Looking at the investment horizon is also important here.
Set your investment budget and mode of investment
The first step towards investing in mutual funds or any other investment portfolio is setting an investment budget. Mutual funds provide the added advantage of investing in smaller amounts in a periodic fashion known as SIPs (Systematic Investment Plans). Mutual funds thus help you in investing as per your convenience. You can increase or decrease the amount that can be invested to suit your needs and balance your other commitments.
Ascertain the returns expectations
Another important step is to know your returns expectations. This will help you in selecting the type of mutual fund that meets the investment goals (for example, fixed-income funds, dividend funds, growth funds, etc.)
Know the tax laws
Tax is an important aspect of investing. In fact, it is the starting point or the need of making investments in most young adults. There are many tax savings schemes that can help you not only save tax but also build a corpus that will eventually generate higher returns. For this, knowing the tax laws is essential as it will help you in making informed decisions.
Go DIY or choose professional help to invest
Most beginners may not have sound knowledge of the markets. This may lead you in making wrong or bad investment decisions while building your portfolio. It is therefore advisable to get professional help. The professional fund managers can assist you by picking the right funds that match your investment objectives. Or you can also use app-based investment platforms like Finity where you can easily invest in direct mutual funds based on solid research-based recommendations from a smart engine that is catered to meet your risk profile.
Investment in mutual funds based on investment objective
After considering the above important points, now it is time to choose the right fund for you. The right fund for each investor can be different based on the factors mentioned above. Investors can create a portfolio with a combination of one or more funds that meet their requirements and can also provide them with the benefit of added diversification.
Some basic pointers that can help you in this regard are mentioned below.
Choice of funds for Risk averse investors
Risk-averse investors are investors with low-risk appetite. There are multiple investment options for such investors depending on whether they want to invest in equity or debt or other options.
- Choice of funds : If you wish to invest in equity, starting with large cap funds seem ideal. Large cap funds are funds that invest in companies having highest market capitalisation and are consistent performers in the market. They have limited risks but the growth potential is also not as high as compared to mid caps or small caps.
- While considering debt fund options, investors can choose to invest in either gilt funds or fixed income funds or floating income funds, etc. These funds provide a steady source of income as well as reduced risk as compared to equity funds.
- Another suitable option for risk averse investors is index funds. These funds are considered to be passively managed funds. The fund manager in these cases does not have the pressure to outperform the market returns but simply replicate them without minimum possible errors. This gives the investors an opportunity to tap into relatively risk free funds at lower costs.
- Choice of funds for moderate or high risk appetite
There are multiple options for investors with moderate or high risk appetite. Most prominent among these are mid cap funds or small cap funds. These are equity funds that invest in stocks of companies having moderate or lower market capitalisation but have high growth potential. The returns on such funds are relatively higher along with higher risks. It is suitable for aggressive investors.
Choice of funds based on investment time horizon
Time horizon is another crucial factor that may influence the decision-making process. Investors looking for long-term investment can opt for growth-oriented equity funds. These funds have a huge potential to grow as the returns are reinvested on the fund.
On the contrary, investors with a short term investment horizon can opt for short-term mutual funds or liquid funds that invest in commercial papers, T-bills, etc.
Choice of funds based on tax plannning
As mentioned above, tax saving is often the prime reason for an investor to start their investments in mutual funds. Tax saving mutual funds are ELSS funds or Equity Linked Saving Schemes. These funds come with a lock-in period of 3 years but provide the investors with a tax deduction of up to Rs.1,50,000 under section 80C.
Mutual funds is an ocean of investment options that can be accessed by young investors or beginners to start building their portfolio. The key to building a successful portfolio is to know your risk assessment and the returns expectations. If you are unsure of navigating your way through quality mutual funds, there are multiple investment advisors that can handle your investments for you and ensure that you get maximum returns.
On the other hand, if you want to build on your knowledge or expertise, it is advisable to start with small investments in relatively low risk funds and gradually build your corpus after gaining sufficient market knowledge.