Investing in mutual funds for beginners is indeed a complicated and daunting task. There are so many different types of mutual funds in the Indian market that you are sure to get lost and confused along the way and end up doing common investment mistakes. However, today, we are going to help you with seven practical tips to consider before you invest in mutual funds for the first time. With these simple tips, the ordeal of investing in mutual funds for beginners will become easier leading to you making better and informed choices. So, without much further ado, let us take a look at them below-
The popularity of mutual funds
In the recent years, mutual funds have surfaced as a highly popular investment choice in India. They are administered in the country by Asset Management Companies generally known as AMC.
Mutual funds are deployed for investing in bonds, equity and other associated investments. They are collectively managed by professional fund managers and have a much higher potential for monetary returns than conventional investment schemes like bank recurring or fixed deposits.
There are different types of mutual funds in the Indian market. The list is somewhat big however, you can learn about them here.
You need to understand them correctly before you proceed towards investments in mutual funds. As the saying goes- mutual funds are a matter of personal discretion so never rush through the process at all!
7 key tips to consider before investing in mutual funds
Now that you know what a mutual fund is, you are ready to invest and make your first move towards achieving financial freedom. However, before investing, make sure you take into consideration the following tips for mutual funds investment for beginners-
1. Be clear with your investment goals
In order to earn optimal returns from mutual funds, you should have clarity when it comes to your investment goals. You must consider the following factors before investing-
- Personal financial goals
- Your retirement Plan
- The period you are willing to invest in (duration)
2. Analyse the different groups of mutual funds
Refer to the link above to compare different mutual fund schemes. If the ordeal seems complicated, rope in a financial advisor to assist you to understand them better.
3. Determine your risk tolerance
No investment is free from risk. Evaluate your capacity for risk bearing before you invest in mutual funds. There are several investment schemes available for moderate risk-taking investors, conservative investors and high-risk taking investments.
Note, your individual risk profile depends upon-
- The number of earning members and dependents in your family
- Your personal capital- base
- Your current age, employability etc.
4. Understand the taxation laws
Always remember a rupee saved is a rupee earned. Examine the tax liability while you pay careful attention to the earning potential of the mutual fund you are investing in. The following are some tax laws you should educate yourself on before investing in mutual funds-
- Long-term capital gains tax
- Short-term capital gains tax
- Deductions under Section 80D
Refer to this link to know more about the above taxation laws better.
5. Consider schemes that are focused on long-term growth
You will get more returns if you focus on mutual funds with a period of at least five years or even more. Equity markets fluctuate a lot in a short- term period so it is prudent to go in for a longer term as the growth curve generally rises in the long run.
6. Consider SIPs or Systematic Investment Plan
One of the simplest ways for you to invest in mutual funds as a beginner is via a SIP. Here, you invest a fixed sum of money every month and you get a number of units allocated to you under the net asset value or NAV. SIPs come with a lock-in period and so this instils a deep sense of discipline in you when it comes to regular investments.
7. Know when you should exit a mutual fund
You should assess how your mutual fund is performing. There are some investors that make the mistake of exiting a mutual fund the moment the market enters into a “bear phase” (hits down like a bear does with its paws). This step is not recommended by financial experts and they advise you exercise some patience.
Skilled fund managers know how to overcome this “bearish” phase and deploy it to their advantage. However, there are some cues you should follow when it comes to exiting the fund. They are-
- The mutual fund has been consistently performing badly for a long time
- When there are sudden changes in the investment objective of the fund and it is not in sync with your investment goals
- When you decide to make structural changes in your investment portfolio
- When you have achieved the desired financial goals from your mutual fund
Last but not the least, always conduct a portfolio review periodically before taking any crucial step especially when it comes to exiting a mutual fund at the right time.
Therefore, from the above, it is evident that, as a beginner, when it comes to investing in mutual funds, never rush into it without proper education about how they work. Not all mutual funds are the same.
Your investment goals determine the type of mutual fund you need for your financial growth. In order to be on the safe side, consult a qualified and experienced financial advisor to assist you in choosing the best mutual funds as per your individual profile for greater success with them in the long run.