We are aware that it is important to invest and that mutual funds sahi hai. However, it is equally important that you approach your mutual fund investments in an informed and disciplined manner so that you can truly harness the benefits of such investments.
Every investor has a certain ability and willingness to absorb risk. In investment parlance, risk can be defined as the probability of loss. As many of us know and understand, all investments, whether debt or equity, come with a certain degree of risk. A guaranteed investment return is one that we should be sceptical of! Having said that, it is imperative that we understand our risk profile and then choose investments that adhere to our willingness and ability to absorb risk. Mutual funds offer investment schemes that are available along the risk or return spectrum. These are not just split between asset classes, but also with each asset class. For example: within equities you can choose to invest in a relatively stable large cap fund or a relatively riskier mid and small cap fund. Similarly, within fixed income, you can choose to invest in a liquid fund or a credit risk fund.
Some investments are made for the long term (5 years and above), some for the medium term (2 to 5 years) and some for the short-term (under 1 to 2 years). Some investments also need to be highly liquid and come with shorter times frames of under 1 year. It is important to know your investment time horizon and then accordingly make your choice. Much like risk, mutual fund schemes are offered for varying time horizons ranging from one week to more than 5 years.
The risk profile of an asset and the investment time horizon can strongly influence the return from an asset. As an individual, you might have varying goals that could include buying a car, buying a house, funding your child’s education or saving for retirement. When making a financial plan ensure that you match your investments to your goals. What this basically means is that identify your goals, identify the time to reaching that goal, determine the return requirement and then choosing an investment that meets that return requirement within the risk or time horizon parameters set by you.
The efficacy of a well-thought out financial plan is limited by its execution. Therefore, it is integral that the investment strategy that you create is implemented in a systematic and disciplined manner. In that regard, a systematic investment plan (SIP) is an optimal way to invest in mutual funds. An SIP entails investing a fixed amount of money on a periodic basis into the desired mutual fund scheme. This not only inculcates discipline, but also helps investors reap the benefits of compounding and rupee cost averaging.