There is a common misconception that mutual funds are for the elite and to be able to make money out of it, one needs good knowledge. The reality is that you can start with a sum as meager as Rs 500 and begin your mutual fund investments. You do not need a degree in finance to be able to invest wisely. A little idea of what a mutual fund is all about and the trends of the present top performing mutual funds in India will give you an idea of what you should expect and where should you invest. In this article, we present a beginners guide that is aimed at familiarizing you with mutual funds.
Work on your financial goals
When you are investing money, it is understandable that you have some financial goals in mind. This maybe your child’s higher education, your retirement or an additional current income. Identifying the time frame for which you are ready to invest the money is crucial in determining the type of mutual fund you would want. Blindly investing in the top performing mutual funds in India might not be wise because what works for most may not work for your individual financial needs.
Identify your risk tolerance
Under normal situations, the longer the period of investing time, the more risk you can take. With higher risk comes the chance of making more money. However, if you are not comfortable with the idea of tolerating market ups and downs, there are always safer mutual fund options for you. Similarly, people are willing to take the risk even with short term investments. There is no need for you to go out of your comfort zone and invest. Realize that mutual funds are an umbrella of investment options and, no matter what your needs are, you will find a viable choice among the given options.
Identifying asset allocation
Asset allocation refers to how you distribute your total investment-able money over different asset classes. A simple rule that you can follow here is to keep your age percentage of the money in debt instruments. To understand this, let us assume that you are 31 years old. In that case, you should invest 31% of your total investments in debt instruments. The other 69% of your investment money can go to equity. However, this might not be applicable for you based on your source of income, occupation, and number of dependents. That is why beginners need to sort out their asset allocation before they make any investment.
Select the type of mutual fund
Once you have sorted your financial priorities, you can decide on the type of mutual find. As of 2019, for long term investment (with the potential risk of market ups and downs), equity funds or equity-oriented schemes are the best choices. Not only do these beat inflation, but they also give good results. For shorter investment periods, one can go for mid-cap funds and index funds. We advise that as a beginner you may start your investment in a diversified fund. With exposure to the sector, you will figure out what is best for you and then you can graduate to specialty fund.
Go for SIPs instead of lump-sum investments
A lump sum investment is good in the way that it gives you an instant chance of catching a market peak. However, for beginners, this may be difficult to identify and you may end up losing money if you invest your money at the wrong time. Going for Systematic Investment Plans (SIP) allows you to invest in multiple market levels and keep your money spread out. These come with the advantage of rupee cost averaging and helps you make the most of your investment over time. That is why it is recommended that beginners start their mutual fund journey with SIPs.
Keeping track
A common mistake that beginners make is that they invest the money and then do not follow up with how the investment is performing. That way, you will never really come to understand how things function here. All mutual fund websites will give you fund fact sheets, performance statistics, and daily NAVs. The quarterly newsletters published by them will have portfolio information. Almost all national dailies have pages that speak of sales and redemption prices of mutual funds. By following them regularly, you will gradually familiarize yourself with the terminologies used and come to understand the core principles here.
Understand that every expert was once a novice and it is okay if you do not understand all of it in one go. Identify your time and risk constraints and then try to invest small sums of money in mutual funds. By following the newsletters that come your way, you will figure out when you are ready to move to lump sum investments. Here’s wishing you the very best of luck for your mutual fund investments.
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