5 Tips on how you can efficiently invest in mutual funds
Mutual funds are the most sought after Investment Avenue. This is due to the several benefits associated with it be it the flexibility of investing smaller sums of money or diversification done to engulf both small and large stocks of different industries.
The best part is that the funds are managed by professionals also known as Fund Managers thereby resulting in more informed decision making.
1. Understanding Mutual Funds
The first basic rule when it comes to investing is to understand your investment avenue. What exactly it does? What are the advantages and disadvantages associated with it?
Once you have properly understood the investment avenue only then you should opt to put your money in it. A mutual fund is essentially a collection of different people’s money coming together and being collected in a common fund.
This fund is then managed by a Fund manager. Each mutual fund is run to meet a specific purpose. You should identify your objective and invest in a mutual fund scheme that serves your requirement.
Different mutual fund schemes have different objectives like Capital security, Growth, and Earnings, etc. choose a scheme according to your need and get started!
Types of Mutual Funds
• Equity Fund
As the name suggests here the money is invested in the stock market. The money is collected from different individuals and invested in the stocks of a different company, be it a small cap company, mid-cap company or a large-cap company.
The distribution of corpus is decided according to the objective of the scheme and also as per the strategy of the fund manager.
A fund manager may see the market conditions and make decisions accordingly, in a bullish market he can bank on Small-cap and Mid-cap stocks as they generate higher returns compared to a Large-cap stock.
AMCs like Aditya Birla Mutual Fund provide various categories of equity funds to investors to choose from.
As we are familiar with the fact that the equity market is risky, the chances of losing money are greater than any other type of MF (Mutual Funds).
• Debt Fund
Debt funds are the funds which invest in fixed income garnering securities be it Liquid funds, Bonds, Securities, Gilt-Funds, etc.
If you are a risk-averse investor who wants capital protection and a regular income then Debt funds can be your go-to.
The benefit of Debt funds is that it provides higher returns than a regular FD and also they are more liquid than an FD, meaning they can be withdrawn before maturity. Most fund houses allow you to do so almost just after a month.
• Money Market Funds
Some of us who like to invest in the money market or the cash market can opt for this type of MF.
They are generally issued by the government thus offering the highest form of security and backing.
If you are looking for a shorter investment duration this is the type of fund for you. This type of Mutual fund also gives you a regular income in the form of dividends. However, Capital appreciation is comparatively very low in this type of fund.
• Hybrid Funds
As the name suggests this fund type is a mix of both equity and debt funds.
This type of fund helps to get the best of both worlds when it comes to capitalizing on market movements and also providing capital security. The distribution is done differently by different fund managers.
The ratio can be 60% in stocks and rest 40% in the bond market or vice versa. But this completely depends on your selection of the MF scheme.
2. Regular investment
An optimal way to invest regular portions of money in MF is through SIP (Systematic Investment Plan).
A SIP can be started with a minimal amount, an amount as small as Rs. 500. Although you are investing smaller sums of money, the power of compounding will help you gain larger returns this can only be possible if you are investing on a regular basis.
Regular investments ensure that even the smallest amount of money invested by you helps you to gain large corpus over a period of time by the way of capital appreciation.
3. Risk involved
As we are aware that Mutual funds are subject to risk in relevance with the market movement. It, therefore, becomes very important to understand the risks involved with the different types of
mutual funds; depending on your risk appetite you should select an MF type.
If you have a larger risk appetite then you should opt for mid-cap or small-cap fund as they offer the highest returns. Similarly, if you have a lesser risk-bearing capacity you should stick to debt/money market instruments.
It is extremely necessary to identify the risk-return relationship offered by each MF scheme.
4. Monitor your Mutual Fund scheme
Monitoring your MF scheme doesn’t necessarily mean tracking your portfolio and each stock’s performance on a daily basis. It simply means that you should check the monthly/quarterly performance statement provided to you by your Mutual Fund house.
This helps to identify whether its fund management and performance is in sync with mentioned objectives and also whether its performance topped or faltered your expectations.
5. Stay invested for a longer period of time
Mutual fund schemes are essentially meant to be done for long term duration to get the highest return. If you are looking to garner higher gains it is possible exclusively with equity markets.
Since the equity markets are extremely volatile in the short run, it is advisable to stay invested for longer time horizons say 5 years or so to attain the benefit of higher returns.
An ideal mix of both equity and debt market is a feasible strategy in order to maintain certain liquidity requirements as well.
One thing you should keep in mind is that Mutual Funds are not ‘get rich with quick investments’ schemes. With each and every Mutual fund scheme you should be thoroughly patient and stay devoted for a longer period of time to earn good returns.
As they say, “It is not wise to put all eggs into one basket” likewise mutual funds will help you seize the opportunity from different investment avenues with a relatively low cost.