Investors rushed to invest in mutual funds in 2018. The very same investors are very cautious while investing in mutual funds in 2019. Mutual Funds Sahi Hai, the super hit educational program launched by AMFI to educate investors on the benefits of investing in mutual funds is still doing great. So what changed? Is it the economic slowdown or something else? Maybe you need to ask these questions before investing in mutual funds.
A mutual fund collects money from you and other investors and then invests, based on the type of mutual fund. This could be equity (mainly in stocks), debt (mainly in fixed income) or balanced (Mix of equity and debt). A fund manager manages this money to give you the best returns. A small fee is charged for managing the mutual fund. Mutual funds are great for those who don’t know much on investing and first-timers in the stock market. You must choose the mutual fund based on financial goals and then invest to achieve them.
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The first question in any investment is where am I going? What do I want from this investment? This is why you must have a financial goal. Goal-oriented investing gives superior returns vs investing without a goal. Financial goals are nothing but the objectives you seek to achieve, through investing. You are able to channelize resources and save money accordingly.
Some financial goals are more important than others. Money for retirement is more important than say buying a car. Resources are finite (You don’t have unlimited money), so resources must be allocated to the most important financial goals. If you don’t set financial goals, you end up spending money on things not really needed.
See Also: How Mutual Funds Work?
Invest in mutual funds based on risk profile. Risk profile is the willingness and ability to bear risk. Equity mutual funds are all about high return at high risk. They are more risky than say debt or balanced funds.
Many people invest in equity funds not realizing the risk in them. They suffer heavy losses if stock markets crash, and blame equity funds. Equity funds create wealth and so have inherent risk. Wealth accumulation happens through compounding and you must stay invested in equity for the long-term if you want to see wealth.
If you invest in equity mutual funds without knowing the risks, you end up withdrawing money at the slightest variation in fund value. The money doesn’t get compounded and you never see wealth.
This is all about investment horizon. It is the time period you are willing and have the ability to stay invested. This is how long you stay invested in a financial instrument without feeling the need to redeem the investment. Investment horizon depends on your financial goal or the financial product you have chosen for investment.
Equity Mutual Fund: If you seek a higher return (say in the range of 9-13%), then invest in equity mutual funds. You must be willing to bear risk and stay invested for 5 or more years.
Liquid Fund: This is ideal to create an emergency fund where you need money at short notice. Liquid fund offers moderate returns with high flexibility to withdraw money when you need it.
How is investment horizon classified? Investment horizon of 6 months to a year is short term, up to 5 years is medium term and above 5 years is long term. Investment horizon determines the investment you choose, and how long you plan to stay invested before redeeming it.
You know the financial goals, risk tolerance and investment horizon. Now, all you must do is fix the investment amount. You may use online calculators or IndianMoney investment calculator to decide on the investment amount.
Let’s say you want to buy a car in 5 years. This is a medium term goal and you may invest in a debt fund to achieve it. The debt fund gives a return of 8%. You would have to invest close to Rs 6,900 through monthly SIP to collect Rs 5 Lakh in 5 years. The SIP contribution increases/decreases depending on investment horizon and rate of return. For higher returns, you must bear high risk and stay invested for the long term.
See Also: How To Invest In Mutual Funds Online?
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