Whether you’re a beginner or consider yourself a seasoned market participant, you should park some or a majority of your investments in mutual funds. Mutual funds are managed by fund managers who are professionals and know how to time and invest in the markets and move the stocks to minimize losses and maximize the return on investment for shareholders. However, fund managers and therefore mutual funds are still subject to the ups and downs of the market, so mutual funds can also underperform or outperform the markets.
You’re investing your money, so it’s up to you to do your research on what type of mutual fund is right for you. You can’t just blindly invest in a fund, no matter what brand name is attached to it. First of all, you need to choose from the wide range of mutual funds in India. These include Open-Ended, Closed-Ended, Equity, Debt, Sectoral, Diversified, Index, Mix-Cap or Small-Cap, Tax Saver and many more. Then you need to decide how much to invest and in how many funds – this can depend heavily on your financial goals. Here are some do’s and don’ts for investing in mutual funds.
• Research different funds and instruments before investing and see the average returns the funds have generated.
• Consider all the money you need to wager, including fees, brokerage fees and taxes.
• Look at the fund’s track record over the long term (if this is a new fund, look at the company’s track record).
• Diversify and keep your money in different funds.
• Use a systemic investment plan for mutual fund shares.
• Monitor your mutual fund investments regularly.
• Put all your money in one or two funds.
• Be blind to market risk, especially in a volatile market.
• Focus only on short-term gains – oftentimes, the additional costs involved will eat into those gains significantly.
• Ignore risk entirely – Review a given fund’s top 3 and bottom 3 monthly returns to get an idea of the nature of the potential risk/reward tradeoff.
• Try to time the market – if you buy high you may have to sell low or your returns won’t be as good.
• Buy and sell your units often.
It is important that you have investment plans for your leftover money, otherwise your money will simply lose value due to inflation. If you invest in the right funds at the right time and in the right amount, you can look forward to good returns.