New Delhi, December 31: Mutual funds are these days one of the most preferred investment options. While some invest in them for their sheer simplicity of investment, others do it to beat inflation. Then there are those who see it as an investment that balances the risk and returns as per their risk profile while also diversifying their investment. However, there are many who still invest in more traditional investment products. They are the ones who keep hearing about why mutual funds are a lucrative investment options and want to figure out if it is the right bet for them. Well here are five things to know if one wants to invest in mutual funds for the first time:
- Why mutual funds: Mutual funds are a great way to earn returns that are hopefully higher than those associated with traditional investments which offer a guaranteed interest rate. Mutual funds are like baskets of investments with one single mutual fund investing in dozens or even hundreds of shares and/or bonds. With investment in the stock and bond market, these funds provide better returns in the long run. These funds also minimise risk by diversifying and investing in several stocks and bonds so that if any of them perform badly, the loss is offset by others.
- SIP or lump-sum: Lump sum is a one-time investment. If one has a substantial disposable amount in hand, then they may opt for making a lump sum investment. However, only an individual with a higher risk tolerance should do that. Regular investors are, however, advised to invest through a Systematic Investment Plan, or an SIP. For example, instead of investing Rs 60,000 in one go, one can invest Rs 5,000 every month through an SIP. SIPs diversify over time and meet the risk of timing cost. Benefit of rupee cost averaging kicks in over a period of time, especially when one gets an opportunity to buy at lows.
- Buying directly or through agent: While it is each individual’s choice, there has been an increase in SIP investment made directly. Direct investments have low investment costs involved which reflect in marginally better returns for the investors. There are several online sites and apps where one can invest in direct mutual funds. However, it is only in times of volatility that an investor’s nerves are tested. And, it is in such times that the industry observers see SIP closures, which means direct investors stop buying when the markets are selling at low levels. It is in these times that an advisor can handhold the investor, reason out the benefits of long-term investing and rupee cost averaging and help him or her stay invested. So while new investors are advised to go through a trusted agent, experienced ones may invest directly.
- An ideal mutual fund portfolio: When it comes to making investments, it has to be unique and customised as per individual investors’ needs. One should take into consideration various factors such as one’s risk appetite, investment horizon and financial goals. Hence, it is often advised that the best way to go about financial planning is with the help of a financial advisor. However, an ideal mutual fund portfolio should have schemes diversified across various asset classes and market capitalisations.
- Selecting a good mutual fund: When making investments, one should consider risk-adjusted returns rather than focusing on maximising returns, since the latter could result in taking undue risks. The factors to be mindful of are the pedigree of the fund house, their track record in managing investments across market cycles, to name a few. Being invested in a good scheme over the long-term can surely aid the investor in having a good investment experience.