Investing is an intimidating task. The market and media are full of options and information. Let’s look at some basic Dos and Don’ts of investing in mutual funds.
Before we get started, the most important thing to keep in mind when investing in any instrument, including mutual funds, is to Have A Plan. Goal-based investing helps you choose the right investment options. You also have a clearer picture of how you must proceed with investing.
Focus on wealth creation
When investing in mutual funds focus on long term wealth creation. Most mutual funds are not the appropriate vehicles to make short-term trades.
Part of having a plan is determining your asset allocation. Asset allocation defines what portion of the invested capital should be allocated to each asset class (i.e. debt, equity, gold, real estate, etc.). Asset allocation would depend on your goals, existing investments, and the current market conditions. All investments should be aligned to your desired asset allocation.
Systematic Investment Plans
Investing isn’t a one-time activity. Financial markets work in cycles, and therefore investing is a continuous process. Disciplined, regular investments result in meaningful long term wealth creation. SIP (Systematic Investment Plans) is a monthly investment in Mutual Funds. This allows salaried savers to easily dedicate a portion of their savings to mutual funds.
Investing is a three-step process, buying, sizing, and selling. Most people just buy and sell. Position sizing is crucial for portfolio construction. Having the right weights to different assets improves the health and performance of the portfolio. Successful investing comes from scaling up positions at the right time to make meaningful returns.
Personal Finance Professionals
The process of drafting a plan, monitoring the portfolio, and taking advantage of investment opportunities is time-consuming. Personal finance may not be your cup of tea. But, you can’t afford to neglect your money. Opting for professional help saves you time, money, and research. Do what’s right for your wealth!
The Do Not’s
Stop investing when markets fall
When markets fall, we tend to halt investing. But, this is a golden opportunity to invest further. Think of it as the market going on sale – you’re getting your best investments at a discount. It would be smart not to let that opportunity slip. Investing more when the chips are down, averages costs. The lower your cost the better your long-term returns!
Invest based on past performance
It’s tempting to opt for a mutual fund with a good track record. Many investors use the past performance filter to select mutual funds. Marketing also focuses on past performance. But, financial markets work in cycles. Funds that performed well in one cycle may not do an encore in the next one. Past performance does not guarantee future returns. Past performance is at its best near the peak of a cycle. Investing at the peak leaves minimal upsides and plenty of downsides.
Both entry and exit in mutual funds need planning. Premature baseless redemptions destroy wealth. Positions that are built over time allow investments to bear fruit. Random withdrawals in between defeats the purpose. This is why planning is important. A plan allows you to map your investments and define your exit strategy.
Stick to unsustainable investments
Fundamentals decide outcomes. Economic and sectoral events have an impact on your mutual fund investments. Consider them before investing further. Most people ignore market cues and stick to unsustainable investments. Things may recover in the long run, but you stand to lose money and time. Sometimes, accepting losses is a better strategy.
Listen to the noise
We’re bombarded with information from apps, friends, colleagues, family, and the media. Some of this is misinformation. Filtering out the noise is a skill. A personal finance professional can help you distinguish signal from noise. Without an unbiased view, one succumbs to the noise and makes the most common investing mistake. Clarity prevents hasty decisions.