Investing in mutual funds is a great option if you want to earn handsome returns. If you are planning to invest in mutual funds, you should start as early as possible. Investing in mutual funds at a young age will give you the advantage of staying invested for long periods of time.
Staying invested for long periods of time will make your investment in mutual funds less risky. Here are some of the things young investors should keep in mind before investing in mutual funds.
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1. Define a goal and invest accordingly
While investing in Mutual Funds, you identify your financial goals and invest accordingly. Financial goals can be defined as something which you want to achieve in a fixed period of time.
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Investing money for children's education/wedding, buying a car and going on a foreign trip are common financial goals.
Defining financial goals helps in setting a target and you must work towards achieving it.
2. Understand your mutual fund
Every category of funds have their own risk associated with them. So, while selecting mutual funds, you should know the amount of risk which you are willing to take.
While investing your money in mutual funds to achieve financial goals, you should know the holding period of mutual fund categories.
You should stay invested for 3 to 5 years in equity mutual funds to get good returns. If your financial goals are a year away, invest in debt funds which are highly safe and give decent returns.
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4. Modes of investing in Mutual Funds
Investment in mutual funds can be done in two ways. It can be done either in lumpsum mode or through systematic investment plan (SIP) mode. In a lumpsum mode, you will have to invest your money in one go. In SIP mode, you can invest on a weekly, monthly or quarterly basis.
The important advantage of investing through SIP is, it helps you to invest in a disciplined manner. You don't have to time the market if you are investing through SIP.
5. Mutual funds are subject to market risk
"Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing." says the disclaimer in every advertisement of mutual funds.
The objective of this disclaimer is to meet a statutory requirement, which is basically meant to communicate the risks that mutual fund schemes carry. So, before making any investment in mutual funds, you should be very clear about the scheme in which you are investing by reading the offer document carefully. Be Wise, Get Rich.
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