Mutual Funds are attractive investments for citizens who want to grow savings over the long-term. Mutual Funds are flexible and can be availed for amounts as low as Rs 500. They can be held for a long time or a shorter period. Mutual Funds are not risk free and have a measure of risk depending on the type.
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New investors mistake Mutual Funds to be a single product. But, Mutual Funds are of various types like equity, debt and hybrid funds. Mutual fund classification is done based on the investment horizon, asset classes and tax treatment.
This diversification often overwhelms investors. Mutual Funds look complicated, but are certainly not difficult to understand. Following are some mutual fund tips for beginners:
Before investing in mutual funds, it is important to understand the risks involved. Mutual Funds carry risk from the underlying securities and investment methodology.
Evaluate risk profile and invest in those mutual funds which best meet expected returns and risk tolerance.
After evaluating your risk tolerance, define investment objectives. Ask yourself ‘how much can you invest’ and ‘how long can you stay invested’. The minimum amount that can be invested in Mutual funds is as low as Rs 500 a month. Apart from ELSS and closed ended mutual funds, you can freely decide when to invest and redeem mutual fund units.
ELSS is a great option for long-term investment and saving income tax. A liquid fund or an ultra short-term debt fund are great, if you want to invest for short-term, maintain a high level of liquidity and receive higher returns. Therefore, depending on your investment objective, choose that scheme which compliments investment objectives.
Never invest in a mutual fund based on the Net Asset Value (NAV). NAV is not an indicator of the performance of mutual funds. The growth of Mutual Funds is represented by percentages.
Let’s say you bought 100 units of a fund with NAV Rs 10 vs 10 units of a fund with NAV Rs 100. In both cases, you are investing Rs 1,000. Say both schemes give 10% growth. You will earn Rs 100 on both the investments of Rs 1,000.
Mutual funds have great scope for diversification. You have variety of options for diversification based on the types of investments. In a bullish scenario, you can invest significantly in small or mid-cap funds which offer a high rate of return. In a bearish scenario, you can invest largely in liquid or ultra short-term debt funds which have lower risk, offer lower returns with a higher level of consistency. You can also invest with a mix of equity funds and debt funds to balance the overall risk and return on your portfolio.
To earn good returns on Mutual Funds, you have to stay invested for the long-term. In the short-term, equity markets are often volatile but in the long-term, they head up. Therefore, focus on investing in equity-oriented mutual funds for 5 years or more to earn good returns.
The ideal strategy of investing in Mutual Funds is to maintain short-term investment (debt) along with long-term investments (equity). Investing in debt funds ensures liquidity and equity funds ensure capital appreciation.
Investments need to be monitored. Monitoring your investment portfolio periodically, helps examine performance. You can figure out which investment is working and which is not. With this information, you can consider reallocation of non-performing investments into other options and give a fresh start to your investment portfolio.
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