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10 Commandments For Investing In Mutual Funds

Mr. C.S. Sudheer | Posted On Monday, August 13,2018, 03:10 PM

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10 Commandments For Investing In Mutual Funds




If you switch on the TV, you will see lots of advertisements on mutual funds. Invest in mutual funds with just Rs 500 a month, invest in mutual funds and save tax, invest in mutual funds for the long term and so on. Why are they so many mutual fund ads on TV?

The Government is encouraging you and other citizens to invest in mutual funds through Mutual Funds Sahi Hai, a campaign to promote awareness on mutual funds. AMFI (The Association of Mutual Funds in India), had launched Mutual Funds Sahi Hai, a campaign to educate the common man on the benefits of investing in mutual funds. The first phase of this campaign was launched in March 2017, and the mutual fund industry added a record 32 Lakh new investors within a year of this campaign.

Mutual Funds run with a disclaimer, Mutual funds are subject to market risks. Read the offer document carefully before investing. Investing in mutual funds is dangerous if you have not studied them. Education and awareness on mutual funds are very necessary if you want to profit from mutual fund investments. Read these 10 commandments before investing in mutual funds.

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10 Commandments For Investing In Mutual Funds


1. Mutual Funds reward patience in the long term investment


An investment in equity mutual funds takes time to give good returns. This is a saying from the great Warren Buffett himself, "In the short term, the market is a popularity contest. In the long term, the market is a weighing machine."

An investment in mutual funds is not all smooth sailing. There are times when mutual funds give negative returns. This is where you must be patient and stick to your investments. Stock markets in India perform badly when International crude oil prices rise or there’s a currency war like the one between US and China. Your mutual fund investments may lose value. But, stock markets turn with time. Invest in mutual funds for the long-term, if you want to enjoy compounding benefits of return on return.

Invest in equity mutual funds with a time horizon of at least 5-7 years to enjoy good returns.


2. Equity mutual funds are volatile in the short term investment


Invest in mutual funds via Systematic Investment Plans popularly called SIPs. SIPs are a method of investing in mutual funds. You invest small sums of money regularly say each day, week or month in a mutual fund scheme. Mutual Fund investments via SIPs hit the $1 Billion mark in January 2018, as lakhs of investor’s pumped money into mutual funds.

Take a look at SIPs in equity mutual funds in recent times. Inflation is going up with rising International Crude Oil prices and US vs China trade wars making imports costly. RBI has gone for two back-to-back repo rate hikes in the last two bi-monthly policy review meets hiking the repo from 6% to 6.5% to control rising inflation.

As interest rates rise, inflows in mutual fund equity schemes are slowing down. New investors are hesitant to invest in equity mutual funds with net inflows in domestic mutual funds slowing down in May and June 2018. What do you learn?

Equity mutual funds are volatile in the short term but stay invested for the long-term and you make a lot of money.


3. Don’t time the markets, spend time in the markets


If you want to invest in mutual funds, the best time is Right Now. Invest in mutual funds through SIPs a popular way of investing in mutual funds. Invest small sums of money each day, fortnight or month in a mutual fund scheme of your choice. Mutual Funds Sahi Hai advises you to invest in mutual funds with just Rs 500 a month.

With SIPs you don’t have to time the market, all you have to do is spend time in the markets.


SEE ALSO: How To Choose The Best Mutual Fund?


4. Never chase market tops and bottoms


It’s every investors dream. Buying a mutual fund at the lowest NAV and selling at the highest NAV. This is a dream near impossible to achieve. Instead of wasting time on futile pursuits, why not study mutual funds and invest in the best mutual fund scheme?

Chasing tops and bottoms in the market is futile. Do your research and invest in a well performing mutual fund.


5. Mutual funds are of different types


Mutual funds are not just equity mutual funds. You have debt mutual funds and hybrid mutual funds. If you are an aggressive investor, invest in equity mutual funds with a time horizon of 5-7 years. Stay invested in equity funds for the long term (1 year or more) and LTCG up to Rs 1 Lakh is tax free.

If you are a conservative investor, choose debt mutual funds. Debt mutual funds invest in fixed income like treasury bills, Government and Corporate Securities, Corporate Bonds and so on. If you stay invested in debt funds for 3 years or more, gains are called long term capital gains (LTCG). LTCG from debt funds are taxed at 20% with the indexation benefit.

A moderate investor willing to take some risk in investments can invest in hybrid funds which put your money in a mix of bonds and stocks. Equity hybrid funds are taxed just like equity funds and LTCG up to Rs 1 Lakh is tax free.

Mutual funds are not just equity. You also have debt and hybrid funds.


6. Mutual funds are just systematic investments


You can invest in mutual funds via SIPs at just Rs 500 a month. SIPs are not mutual funds, but just a way of investing in mutual funds. SIPs encourage disciplined investing, as you put money regularly in mutual funds. You also enjoy the compounding benefits of return on return. The returns you earn are reinvested and earn more returns with time.

Invest systematically in mutual funds via SIPs and earn return on return.


7. Never exit mutual funds in a panic


When stock markets crash, many investors sell their mutual fund schemes and exit in panic. Warren Buffett says, Be Fearful when Others are Greedy and Greedy when Others are Fearful. The same rule holds with mutual funds.

Stay invested in mutual funds for as long as it gives the desired returns and meets investing objectives. Exiting good mutual funds just because stock markets have crashed is a bad idea. NAV in mutual funds is just a number.

 High NAVs or Low NAVs in mutual funds don’t matter. Just stick to the mutual fund, if it meets investment objectives.


8. Mutual funds are all about investment goals


Why do you invest in mutual funds? Is it not to meet investment and financial goals? If a mutual fund is performing well and moving in-line with financial and investment goals, there’s no need to exit the investment.

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.


9. Keep emotions far away when investing


Greed, Hope, Fear, Envy all these are emotions. Mutual Funds and emotions don’t mix. You invest in mutual funds to meet certain investment goals. These goals may be buying a car or investing for children’s education or retirement.

Remember, your investment goals are different from other people’s goals. It’s wise to ignore friend’s advice when investing in mutual funds. Your friends may advice you to invest in this or that mutual fund scheme.

Remember: Your friends have different investment goals and select mutual funds based on them. Invest according to your investment goals.


10. Keep the money for needs, then invest


Many people invest the money they need on food, clothes and living in mutual funds. This is a terrible mistake. Keep money for needs and then invest in mutual funds.

Invest only the money you can afford to lose in mutual funds or you may be forced to exit in bad times.


Be Wise, Get Rich. 

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