10 Tips to Invest in Mutual Funds

“Risk comes from not knowing what you are doing”

~ Warren Buffet

A plethora of Asset Management Companies (AMC) offer mutual funds. How do investors find their best fit? Research and strategy play a crucial role. Including mutual funds in your investment strategy requires dedication and effort. A Fund Manager decides where your money goes, but you must still plan and strategize your investments.

A few common mutual fund mistakes that most investors make are:

        • Investing without a budget
        • Neglecting your risk profile
        • Saving across too many funds
        • Disregarding debt funds
        • Investing with a ‘short term’ approach


Here are 10 tips to pick a winning mutual fund:

1. Identify Your Goals

Ask yourself the following questions to gain clarity on your investing goals:

        • Are you looking for income or long-term capital appreciation?
        • Why do you want to make returns? What purpose will your savings serve?

Select mutual funds that suit your goals. Consider the time horizon. If you require funds before a period of 5 years, then debt funds are a safer bet. However, if you are comfortable with a longer time horizon, then equity funds become suitable.

2. Accept Your Risk Tolerance

        • Can you tolerate a portfolio that experiences extreme ups and downs?
        • Are you more comfortable with a conservative investment strategy?

Investments and risks go hand-in-hand. Therefore, your risk tolerance is a significant factor of consideration. For risk-averse investors, fixed-income funds which include government bonds offer more security. For risk favourable investors, equity funds are more attractive.


3. Consider Value Delivery

While selecting mutual funds, consider the overall appeal of the portfolio. Markets work in cycles. A mutual fund that performs in the current cycle need not be the leader of the next cycle. Investors benefit from looking beyond the past performance and rating of a mutual fund. They must consider the value delivery of the fund. This improves the probability of earning attractive returns.


4. Keep Your Options

Depending upon your budget, risk tolerance and time horizon, there are numerous categories of mutual funds from which you can make a selection. SEBI has categorized mutual fund schemes in the following manner:

        • Equity Schemes
        • Debt Schemes
        • Hybrid Schemes
        • Solution-Oriented Schemes
        • Other Schemes

With so many alternatives available, it is essential that you research and investigate the pros and cons of each scheme and select the ones which are most appropriate for you.


5. Evaluate the Return Potential

The ultimate purpose of investing in mutual funds or anything for that matter, is returns. Merely selecting a scheme due to attractive returns is not desirable. Unlike fixed deposits where you earn steady returns, the mutual fund market is dynamic. Investing in mutual funds does not offer linear predictable returns. There may be periods of underperformance, no performance, or high performance when compared to fixed deposits. Therefore, investing through a whole cycle is important. Desirable CAGR returns can be achieved in the long run through market cycles.


6. Observe the expense Ratio

The percentage of assets that are devoted towards things like management advisory fees and basic operating expenses is known as the expense ratio. This is basically the cost that you incur to own the fund. Therefore, the more the expense ratio, the lesser returns you make.


7. Track Your Fund Manager’s Decisions

Once you plan which fund(s) to invest in, from here, the Fund Manager takes over. Your Fund Manager is responsible for taking decisions with respect to your mutual funds. Understand your Portfolio Manager’s thought process, investment style, analysis, and decisions. Examine and analyse the quality of their investment decisions.


8. Know Your Exit Strategies

Investment in mutual funds requires continuous evaluation to determine whether to stay invested or exit. Exit load is a cost that an investor must bear if he or she sells the mutual fund units before a predefined timeframe. Simply put, it is a mechanism to deter investors from a premature exit.

There are some key considerations with respect to tax. For example, investment under ELSS is qualified for tax deduction under Section 80C. So, make sure you’re well-versed with the conditions and tax implications before buying or selling any mutual funds.


9. Ensure Diversification of Assets

Regardless of your ability to judge the success or failure of a mutual fund, diversification is essential. Diversification is an inherent risk management tool. The loss from one bad apple is mitigated by not putting all your eggs in one basket. The key is to invest across sectors, asset classes, and fund categories. This ensures that your portfolio is healthy and can weather market cycles.


10. Accept Professional Help

Clearly, investing is not rocket science, but it involves a heavy time commitment. Investment is a process and not a one-time activity. The amount of time and effort that you spend to earn money, needs dedication and commitment to grow well. Therefore, you need to evaluate all the available options and select the most suitable mutual funds.

Many people don’t have the knowledge, time, or expertise to handle their investments. Seeking professional help is a suitable alternative. With their expertise, investing in mutual funds can be a cakewalk. Researching, planning, analysing and monitoring now become the responsibility of your financial advisor. Sit back and relax, while your financial advisors help you grow your wealth!

Seek professional help today, for a stress-free tomorrow!

Leave a comment

Open chat