Investing in mutual funds India can be a good proposition if you are looking at earning handsome returns or growing wealth for the future. However, you should also be aware about mutual fund risks that are prevalent owing to diverse macroeconomic and other market factors.
Before you start your monthly mutual fund investment journey, here are the top 5 basics you should carefully look at.
- Have the core aspects ingrained in your mind- You should always keep in mind that you are selecting mutual funds for accomplishing specific financial goals in the future. Zero in on your specific financial objectives before you deploy your money in the mutual fund market. Find out the time you have to achieve these objectives and take into account factors like the mutual fund liquidity while working out the payable tax on mutual funds likewise. This will help you arrive at an estimated future return. Thereafter, assess risks and your ability to withstand the same.
- Divide goals with care- Mutual fund performance will always vary so you should carefully divide your financial goals into long term and short term objectives. Go for debt mutual funds investment plans for achieving short term objectives along with looking at safer choices like bank deposits. This refers to meeting goals in a span of 3-4 years at the most. For long term objectives, consider tax saving mutual funds (ELSS) or high income mutual funds like equity funds. This will entail an investment horizon of approximately 5-7 years on an average.
- Remain practical at all times- One of the rules that people often end up neglecting is practicality at all times. Do not be ultra anxious or conservative while steering clear from an over-adventurous and experimental approach. Remember that your mutual fund NAV (net asset value) is not always the indicator of overall performance. Stick to equity for long term objectives and debt for short term ones. Whenever you opt for a riskier investment for meeting short term objectives, you are already taking on a sizable risk. You will not have the luxury of ample time for recovering losses since the investment is for a smaller duration. Equity is thus recommended only for those with long term horizons.
- Do not underestimate market risks- Most investors jump into investments, pleased by the efficiency of tax on mutual funds and the attractive mutual fund returns that are historically generated by successful performers. Yet, do not underestimate market risks by all means. Most investors feel that they have high appetite for risk when they foray into the market and it is bullish. However, whenever the market turns bearish and investment values come down, they realize the actual risks that they have taken on. Hence, choose equity and debt funds on the basis of your financial position and risk profile.
- Long-term performance matters immensely- Choose your mutual fund company or firm with care. A reputed firm that invests in funds with good market performance over the long term is always recommended. Go for funds/plans which have historically delivered steady returns instead of choosing current star performers which are topping the charts all of a sudden.
These are some of the basics that you should keep in mind before deploying your hard earned money in mutual fund investments. Take your time and choose wisely before investing.