Before investing in mutual funds one needs to understand the fundamentals of investment, planning and goals which one is seeking to achieve. It may be for your post-retirement life, education of your child or just to save tax. Let us look at some basic tips one can follow while investing in MFs.
Avoid taking advice from family or friends
The basic mistake one does while investing their hard earned money is to take advice from family and friends, who may not have knowledge about financial sector. This multiplies the risk and does not help get profitable results. The general tendency of humans is to follow trends. Whatever is trending and eye-catching, people tend to lean towards that.
Imagine taking advice about cardiac surgery from your uncle who works for a supply-chain restaurant. Will it be feasible? One should take advice from financial advisors who can give you mature suggestions based on your financial targets.
People often listen to advice from family or friends and invest in Fixed Deposit for tax benefit without realising that the lock-in period is for five years. Whereas in debt funds there is no lock-in period. The investor can exit at any point in time by paying short-term capital gain. One can also invest in Fixed Maturity Plan (FMP) where the return is around 9 to 9.5%, which is higher than that of FDs.
Be a long-term investor
If you are looking for short-term benefits, MFs are not for you. One has to be patient enough for the holdings to convert into a valuable asset. As soon as an investor invests in MF, he immediately starts tracking financial news on a daily basis to check what is the situation of his investment. But this is not advisable.
The market does not fluctuate on an hourly basis until and unless there is an international crisis. It is advisable to invest and forget about it and to give your investments space and time to grow. Understand that the maximum return in long-term investment is around 160% and the minimum is -57%. Long-term investments tend to give higher returns, but are sensitive to interest rates.
Controlling emotions
Investments needs a lot of settlement in terms of emotions. Investors should never panic if they don't get the desired results. Investment is the same as planting a shrub, it takes years or decades to grow a small plant into a big tree. So be tolerant and learn to trust your instincts. One should never compare profits from their investments with others. Because the time when the fund was bought plays a crucial role in the results.
Know your objectives
We invest seeking benefits at some particular point in life. Before buying MFs one should always be clear in one's mind as to what the goals are. Investors need to understand the objective behind any investment. Before choosing a fund one should be aware about the risk tolerance. Choosing the right fund is an important factor which affects the growth. One should also learn to ignore the noise in the market and be patient. If one is looking for short-term investment then choose from liquid funds, credit risk funds or equity saving funds. This helps diversify the portfolio. If one is investing in pure equity, then don't check the portfolio before three years.
Investments are important because today, mere earnings are not enough. If one wants a worry-free life, one should understand the power of investment. Investments are a way to fulfill your dreams and goals. But before entering the world of investment, understand basics. Be clear about how to invest, where to invest and in what to invest. These basic tips will help you reach your desired goals.
BE SAVVY INVESTOR
- MFs are not for those looking for short-term benefits
- Don’t start tracking financial news on a daily basis once you start investing in MFs
- Don’t compare your investments’ returns with those of others
The writer is president, VSRK Wealth Creator
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