Mutual funds have always been a preferred choice for mature investors. More and more people are investing in mutual fund schemes to meet their financial goals. Often first time investors are confused and hesitant about how to go about investing. It is essential to choose the right schemes so that you can get the expected returns.
Here are some important tips to help you make the right decision when investing in mutual funds.
Assess risk appetite and expectation
Before investing in mutual funds, you should assess your risk appetite and expected return on investment. Therefore, choose the mutual fund scheme that helps you achieve your identified financial goals. For example, suppose you want to build a certain size of corpus in the next ten years and your risk appetite is high. You can choose a mutual fund scheme that can offer you high returns corresponding to your risk appetite and help you build the desired corpus to achieve your financial goal after ten years. Depending on your risk appetite, identify how much you need to invest in a mutual fund scheme to achieve a particular financial goal.
Diversify your investment
Investing an entire fund in one or two mutual fund schemes can expose your portfolio to higher risks. Ideally, you should diversify your investment portfolio across different mutual fund schemes and across different mutual fund companies.
Adhil Shetty, CEO, Bankbazaar.com suggests, “An adequately diversified portfolio can significantly reduce portfolio risk. However, it would help if you avoid over-diversification as it can erode your portfolio returns. Always diversify to the extent that portfolio risk falls within your risk appetite range without compromising expected investment returns.
There are many mutual fund companies, each offering many schemes. Are they all good for investment? How to decide the best scheme to invest your money? Before investing in mutual fund schemes, you should check their past performance, management efficiency and expense ratio and compare schemes online to identify the ones that have the potential to provide you a steady return. Prefer direct plans over regular plans as they have a lower expense ratio.
Lumpsum Investment Vs SIP
If you plan to invest a lump sum, you may not want to take a higher risk. So a proper debt fund can be a good option. If you are willing to take a moderate risk for a better return, you can invest in a balanced fund. For higher income, you have to take higher risks. So you can go for investing in a large cap equity fund. Diversify your fund through different schemes and different mutual fund companies. If you want to reduce the risk further, you can park the mutual fund in a liquid fund and use the STP option to invest the money in a staggered manner in a suitable mutual fund scheme.
If you are planning to build a corpus while investing in installments for the long term, you can invest through a Systematic Investment Plan (SIP) in the right equity fund in sync with your risk appetite. SIP can help you earn an attractive return, especially when you invest for the long term amid volatile market.
Review and rebalance your portfolio
When you invest in mutual fund schemes, you should review your portfolio from time to time and check how your investment is doing. Sometimes it may lag behind your expected level of performance; sometimes, it can be better than you expect. If it falls short of your expectations, you may need to switch investments from underperforming funds to better ones. On the other hand, if your portfolio has significantly exceeded your expectations, you may need to rebalance your portfolio by shifting investments from a high-risk to a low-risk mutual fund scheme and secure the return already earned. .
Finally, you should check the tax implications of short-term and long-term investments in different types of mutual fund schemes before investing. Start investing in mutual funds at a young age. It can help you maximize your return on investment by staying invested for a longer term.