Successfully, investing in mutual funds is a challenge for us as it is extremely baffling to figure out the right scheme from numerous mutual fund schemes. Most people assume that financial planning only aims to generate high returns, but there’s more to it… So in order to make the situation a bit easier for you please read the following 10 tips which you should keep in mind while investing in mutual funds.
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In this article…
Draft an Investment plan
Before deciding the type of fund you are going to invest in, design an investment plan for yourself. Your plan should be well drafted and should have the objectives of your investment specified.
Try to understand the fund in which you are investing
Mutual funds, are supposed to make your life easier as they invest funds on your behalf. However, in reality they make the situation worse by asking you to choose from numerous schemes. So, before choosing your scheme try to get a distinct idea about the type of fund in which you are investing.
Check the past performance of your mutual fund
Keep a record of the past performance of a mutual fund before investing in it. If you have decided on the category exposure of funds, then choose the benchmark of the particular fund and also a common benchmark. In this regard, Sensex can be a common benchmark. Also, get a distinct idea about annualized and absolute returns of the fund.
Don’t avoid index fund
Mutual fund investors often ignore a simple low cost index fund in favor of the high-cost actively managed fund. This is a mistake.
Experience of fund managing team
Longer the tenure of the members, better will be their experience which will ensure that you are investing your hard earned money in able and deserving hands.
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Do not commit common mistakes
Very often investors sell the winning funds while they adhere to the losing ones. This is a major mistake. It is extremely vital to be realistic about investments that are performing not as well as expected. It is important to accept the shortcomings and try to make up for the losses because if ignored, the future losses can accelerate to a remarkable extent.
Stay invested for a longer period of time
If you are investing in an equity fund you should invest for at least 3-5 years. By waiting for 3-5 years you not only receive ample time to revive your losses but also an opportunity to hike your returns. However, the duration of investment in debt funds and money funds can be lower.
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Beware of fund robbers
Invest in mutual funds which guard you from the five major fund robbers namely; inflation, market volatility, income tax, interest rates and incorrect asset distribution. The fund which acts as a shield before these fund robbers is balance funds. A Balance fund invests in both equities and debts parallel and therefore the equity component in the fund protects your money from the above mentioned vices. Also try to invest in a fund with a low exit load as this will help you in the long run. An exit load is charged at the time of redeeming or transferring an investment within schemes.
Low NAV doesn’t mean cheap mutual fund
A popular misconception about mutual funds is that funds with low NAV are assumed to be cheap compared to those with high NAV’s. However, you should always keep in mind that a low NAV actually means that the fund has certain securities which have hiked in values as the fund started investing in them.
Never forget your mutual fund investments
The title might seem vague but trust me many investors simply invest in mutual funds and then they simply forget about them. Your job is not simply over by investing in a proper mutual fund, but on the contrary it has just begun. Therefore, while you invest in a fund you need review of your fund portfolio from time to time.
So, there you go. Got questions, ask me in comments.