Mutual funds are one of the most popular and convenient vehicles for investment. Depending on your risk appetite and investment objective it offers you a wide range of options to choose ranging from stability, growth and high returns. There is no “One-size-fits-all” strategy for investing in mutual funds. However, there are some broad points one can adhere to while investing in mutual funds which are:
a) Gauge your risk appetite:
It is important that every investor assesses his/her risk appetite before investing in a mutual fund. Be aware of your cash flows, assets, financial liabilities before investing in the mutual fund of your choice. You can invest in some of the best mutual funds, but they might not work in accordance to your risk appetite. Ideally, an investor’s risk appetite should be aligned with that of the mutual fund they are applying to.
b) Diversity is the key:
Investors should diversify their portfolio across sectors so as to hedge their holdings against volatility and weakness in one or two sectors. However, a portfolio diversified in too many sectors is difficult to manage and may not be focused. Hence, one should diversify their portfolio in focused manner in such that the returns are balanced.
c) Avoid investing on emotions:
When it comes to financial investing, it works better when investors keep their emotions aside. Emotions tend to cloud rational decisions and hasten actions without a well thought out plan. At the least , this could lead to certain unfavorable outcomes that could be detrimental to an investor’s portfolio.
d) Link mutual funds to goals:
Investment in any instrument be must be made in accordance with the financial goals an investor hopes to achieve. You can calculate the amount you require at the end of a goal and then start a SIP in a fund towards that goal. With the help of a mutual fund calculator, you can calculate the right SIP installment you need to make every month given the amount of time you have to achieve the goal. If an investor’s investment horizon is for 10 years, short -term volatility should not be a worry. A period of 10 years is enough to iron out the effects of the short-term volatility. By creating a detailed financial plan and investing accordingly, one can avoid making knee-jerk decisions.
e) Don’t invest without proper knowledge:
Investors may not know the best mutual funds for them to invest in. Instead of making a wrong choice for their portfolio, its is always better to consult a certified mutual fund advisor for the same. A certified advisor will be in a better position to assess the right fit for an investor’s portfolio.
f) Keep an eye on the costs:
While investing in mutual funds, fees do matter; they are deducted from your total returns. Be very sure to look at the costs of investing in a particular mutual fund as well as the price paid for managing your investments as well.
g) Rebalance your portfolio periodically:
Timely reviewing the performance of your fund would keep you aligned with your investment goals. Failing to review your scheme’s performance periodically can cost you a fortune. That does not need to you need to check on your funds every day and make changes depending on their day-to-day performance. Generally, the ideal review period is one year. One need not switch funds in case of small deviations from the intended results. But do keep a track of irregularities recurring every year. Especially in comparison to the benchmark index. This could be a clue to exit the fund.
Also Read: Ask Yourself Before Buying an Insurance Plan
DISCLAIMER : Stock market and mutual fund investments are subject to market risks please verify and consult your financial adviser before investing.