A mutual fund investment is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash or other assets. Investors have the option of investing in various mutual funds schemes. Though predicting how a mutual fund would react in a particular situation is tough and choosing a scheme from thousands of mutual fund schemes available in the market is not easy for many investors. Opting for the right mutual fund scheme in India is one of the biggest hurdles faced by many new investors. It requires a significant amount of research and effort to choose the right kind of fund, manage it and earn returns. Your choice of type of fund must depend on your investment goal, time horizon, risk appetite and so on.
Below we discuss a set of do’s and don’ts for investment in mutual funds in India.
1. Do research before Investing
When it comes to mutual fund investment, there is a lot to choose from and the best way to address this is to spend time in researching about it as well. The ones with a proven track record over a period of time are the ones that you should ideally prefer. Apart from past performance, know the scheme?s investment philosophy and how effectively the fund scheme sticks to its stated objective. Knowledge brings the best! Investing your money without a sound knowledge of market and its functions may lead you to lose money. Learning the market rather would be profitable.
2. Long-Term Performance
Always monitor a fund?s long-term performance and refrain from getting influenced by its statistics from the recent past. Don’t simply invest in a fund because your friend has bought it recently or it was recommended on a website or TV program. In a market boom most funds will do well but that doesn’t suggest that all of them will consistently perform. Track the fund’s performance in a market boom and market crash. Invest in a fund with at least five years of performance. Don’t blindly chase a fund for its current performance or overlook another for its lackluster performance in the near past.
3. Don?t Panic
Each investment comes with its share of risks and a suitable investment time frame for which the instrument is suited to invest in. As an investor you should understand that short term market movement is meaningless. So, do not panic in times of market correction and swings?the mantra to be a successful investor is to stay invested through market cycles. Don’t check your fund’s NAV every day or week or even month. NAV may fluctuate in the short term but all that matters is the percentage gain or loss. The average investor starts selling their investment during the market downturn thinking their money is lost forever, whereas smart investors know how to hold their investments in a volatile market and stay invested over a full market cycle.
4. Invest for long-term
Mutual funds in India are easily affected by market volatility. They tend to fluctuate on a regular basis with every up or down in the market. Weigh the performance over a longer duration to get an unbiased opinion of the performance. Thus, to know if a fund is really performing well, check its performance of the last 5 years. This would give you a fairly stable idea of how the fund is performing under different conditions. Withdraw from it only if its performance has been poor compared to its peers for over a year or so owing to fundamental factors such as change in composition of portfolio, change in fund manager, etc.
Recommended Read: 10 Top mutual funds to invest in for long-term growth
5. Invest according to your risk profile
Your risk appetite will depend on your investment goal, time horizon and age. Risk and return are two parameters which go hand in hand. It is often observed, a financial instrument which has the maximum risk is the one which gives the maximum return. Mutual funds are less risky than other instruments. However there is certain amount of risk in every financial instrument hence if you are looking for a stable income then you must go in for a fund which is exposed to lesser risk.
6. Don?t ignore expenses
Mutual funds charge fee from investors for covering management expenses, transaction charges and so on. Funds also charge an exit load for withdrawal before a specified time period. Although charges alone don’t matter much, if you must choose among equally well performing funds go with the one having lower expense ratio. In the long term high expense ratios can eat away a significant portion of you returns due to the effect of compounding.
7. Do consider taxation
Taxes is another issue that most investors ignore when it comes to investment. If not planned wisely, it could even bring your annual returns down by a significant amount as you would have to spend that in paying taxes. Therefore, it is essential that you check a fund?s tax efficiency before investing. Usually, funds that have steady long-term returns would have better tax efficiency as compared to the aggressive short-term ones.
8. Diversify your portfolio
Many first-time investors of mutual funds invest their entire amount in just one mutual fund. However, instead of putting all eggs in one basket, diversify by investing in different fund themes. Thus, even if a particular scheme under performs, your investments in other schemes may save the day for you by providing higher returns and balance out overall returns from your portfolio. A healthy mix in your portfolio, however, might help you by giving you good returns and profits.
9. Don?t hold under-performing schemes
Investing in funds is not a one-time exercise of choosing a fund scheme to invest in. To get the maximum return or also to know if your chosen scheme is performing in line with its peer group, it is suggested that you review your mutual fund investments atleast once every year. Such a review gives you the option to consider staying invested in the fund scheme or to exit it due to lack of performance. Do not get emotional to stay invested in a fund even when it starts to underperform.
10. Do buy no-load funds
Try and search for some reliable no-load funds over one that charges a load fee. A load is simply a one-time fee that you pay for the right to buy the fund. Although the chances of finding good funds that do not charge the load amount are very less. Besides, with more and more investors not preferring loads, the load fund firms are being compelled to lower or eliminate their load amount. This can certainly be an opportunity worth considering for you when doing mutual fund investment.
11. Don?t try to time the market
Timing the market is not just stressful but also very risky for both your financial and emotional happiness because predicting the market in India is very difficult. Timing the market means trading in and out of funds when you think one sector ? or the market as a whole ? is about to go through a downturn or an uptick. ?The market as a whole or a particular sector can have multiple influencers that drive it either up or down. Mapping each one is practically not possible and people who try to make those guesses end up losing money. It is, therefore, best to stay away from it than get it wrong.