Mutual funds investments can be a great way to build wealth over time with access to benefits like professional fund management, diversification, liquidity, schemes for every financial goal, and cost-effective investment methods. Whether you are looking to save for retirement, buy a home, or grow your children’s college funds, there are different mutual fund schemes that cater to investors with different goals, time horizons, and risk profiles.
But investment in mutual funds is not just about choosing the right fund and watching your balance grow. There are some other important aspects that every responsible mutual fund investor must consider. From understanding the basics of risk and returns, to leveraging different investment strategies, let’s break down these aspects in detail.
Understand your risk tolerance
Knowing your risk tolerance is crucial because it can help you determine which mutual funds are right for you. Determine whether you are an aggressive investor willing to take on more risk to achieve higher returns, a moderate investor who prefers capital appreciation with relatively less risk, or a conservative investor searching for low-risk investments to achieve stability and preserve capital.
If you are an aggressive investor, you may be more suited for equity mutual funds with higher risks and higher potential rewards. On the other hand, if you are a conservative investor, it can be wise to invest in bonds having lower risks and stable returns.
Diversify your portfolio
It’s important to diversify your portfolio by investing in different types of assets and sub asset classes. For example, if you want to invest in stocks, consider buying shares in companies from several different sectors (e.g., technology, healthcare, energy). This helps reduce risk while still allowing you to leverage potential returns from each sector. Additionally, paying attention to how much of your portfolio is allocated to one sector versus another, is important as you don’t want all your eggs in one basket!
Explore various opportunities
Exploring the many opportunities available in mutual funds is key to becoming a smart investor. For instance, equity linked savings schemes (ELSS) are equity mutual funds that have the potential for higher returns, with added tax benefits as you can claim tax deductions of up to Rs.1.5 lakh each financial year. On the other hand, hybrid funds offer you access to multiple asset classes with a single fund, offering you more diversification. Researching the different types of mutual funds and their structures can help you identify suitable opportunities that align with your goals and risk profile.
Consider external factors
Inflation, economic cycle, and geo-political risk are some external factors that can impact your investment and the returns.
External factors are beyond your control. You can’t predict when a recession will happen or its effect on the markets. However, you can control how much risk you can take as an investor. Researching market news and keeping an eye on macroeconomic developments will help you stay ahead of any changes in order to get the most from your mutual fund investments.
Invest regularly and stay focused
It’s important to remain disciplined when investing in mutual funds. Don’t panic with short-term fluctuations or try to time the market by buying or selling too quickly. Instead, stick to your investment plan and keep building up your investment funds free of emotion. You can set up a systematic investment plan (SIP) to consistently contribute towards your financial goals and stay focussed.
Also, investing in SIP mutual funds helps remove the emotional component of investing, as your money automatically goes toward your instalments. This frees you from having to decide when it’s the right time to buy or sell and lessens the temptation to make impulsive decisions based on fluctuating markets.
To wrap up
Becoming a successful mutual fund investor requires research, knowledge, and discipline, but when practised, it can open up many new investment opportunities. Also, note that investing in mutual funds isn’t a set it and forget it approach. Keeping up with current events, reading analyst reports, understanding the basics of diversification, reviewing your portfolio frequently, and being consistent are important components of being a responsible mutual fund investor.