To many people who are not accustomed to the prospects, mutual funds might seem like an intimidating and perplexing concept. While traditional investment methods such as fixed deposits require little explanation, investors rely on an expert while going for mutual fund investment.
What mutual funds are and how do they work
Think of trust. Trusts are all about the safekeeping of some property by appointing a person to take care of it, only for some beneficiaries to avail of its benefit later. Mutual funds also are like a trust that pools money from investors sharing a mutual investment objective. The caretaker here is a professional fund manager who utilises these funds to invest in stocks, equities, and different money market instruments to hone investors’ wealth. The income gained from mutual funds is then distributed proportionately among all the investors after deducting certain expenses.
Mutual fund investment does not require the investor to possess an acumen of how finances work; the fund manager selects stocks with top-performing investment options to churn the best possible returns for the investors. It’s that easy!
Investors can either invest in mutual funds online or offline. Here are some tips to make the best out of your investment-
1. Focus on fee comparison:
Paying the fee for mutual fund investment is inevitable; what needs to be considered is the limit of the fees. Choosing funds with lower fees and avoiding mutual funds with sales loads will help you retain more of your money. Don’t hesitate in investing in funds that aren’t actively managed since an actively managed fund might charge an additional annual charge: less fee, more efficiency.
2. Defining a mutual fund portfolio:
Having a mutual funds portfolio outlining the financial objectives, time horizon, risk appetite, and other similar factors could be a little tricky. How many funds one should invest in is a dicey question. Studies reflect that after a certain point, the standard deviation of a portfolio stays the same irrespective of the number of funds. Hence, it is suggested to have a maximum of 5-6 funds in your portfolio.
3. Adapt to SIPs:
SIP or Systematic Investment Plan is an investment strategy that motivates disciplined and regular investing with small investments. It not only eliminates the need for market timing but also helps reap greater benefits through compounding. You can learn more about how to start sip from your fund manager.
4. Time horizon is essential:
Regardless of your personal risk appetite, the time horizon must be the sole deciding factor for fund selection. Someone who detests risks should not choose a low-risk debt fund when his/her retirement goal is, say, thirty years down the lane. This would add up the cost of conservatism to lakhs or crores. Besides, the long-term goal that it is, the risk of losing capital could increase manifold.
On the contrary, flamboyant risk-takers might also need to consider a muted stance while planning for short-term equity-term goals since this could implore them to book losses while pulling capital as the goal date approaches.
5. Stress more on periodic review:
Undergoing a periodical review of a fund’s performance enables you to rebalance your portfolio as per changes in your risk appetite, age, and financial goals. This would make investments remain active as per the market conditions and help generate a decent return on the overall portfolio throughout the investment tenure or until you want to achieve the targeted returns.
We hope these tips help you invest in mutual funds in a smarter and better way.