Mutual funds are a great way to invest and multiply your wealth, but as the statutory warning says the “investments are subject to market risk”.
So here are 10 tips we have gathered to help you while investing in mutual funds:
1. Know your schemes
There are several mutual fund schemes and each has its own risk level. Equity funds come with the highest risk, while liquid funds have the least. Go through all available schemes carefully before investing.
2. Fix your time frame
Have a clear idea about when you want your money back and that too with the best return. Then go through the various scheme related documents. Cross-check how a particular scheme that you chose, performed in the past.
For example, it will be a good idea to go with an equity-based mutual fund scheme if you want your money back after a five-year lock-in period.
3. Go slow
Don’t be in a hurry and start investing big amounts at one go. Plan and invest gradually. If you are looking at long-term schemes, it has been found that small but regular investments get you better returns.
So you may go the Systematic Investment Plan (SIP) way and start investing a fixed amount every month.
4. Invest early
While many advise that one should buy low and sell high, this formula is quite hypothetical because you can’t time the market. So the best option left is to invest early and stay invested so that your money gets enough time to grow.
With mutual funds, you get a large scope to diversify your investments. There are diversified equity (large-cap, mid-cap, small-cap), sectoral funds, commodity-related funds, global fund of funds, index funds and debt-based funds. Do your homework and invest wisely.
6. Don’t get tempted by NAVs
Net Asset Value (NAV) of a mutual fund, unlike stock prices, does not vouch for the quality of the scheme. NAV is the worth, in market terms, for each unit of the mutual fund.
And hence, it doesn’t mean that a scheme with an NAV of Rs 200 is better than another scheme with an NAV of Rs 50. Similarly, investing during a New Fund Offer (NFO) does not suggest that you are buying it low.
7. Dividend is not bonus
There are mutual fund schemes that offer dividend plans. But dividends are not bonus. In fact, dividends are paid from your own holdings. So, don’t get lured by a plan that offers dividend. Better, invest in growth plans.
8. Invest in balanced funds
Include balanced funds and index funds in your portfolio. Investing in balanced funds will cushion your money from financial challenges like inflation, interest rates, market volatility and for achieving diversification.
9. Consider other investment options
Don’t put all your money in mutual funds, no matter how great the schemes are. Consider other investment options like real estate, direct equity, government bonds and other fixed income assets.
10. Monitor regularly
It’s not about investing and forgetting. Mutual fund investments need to be monitored regularly to avoid market risks by taking prompt action well in time.
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Sreya is based in Kolkata. She is a Senior Editor of Big Wire.