Expert advice

Apr 24, 2014,15.22 IST

5 tips to invest in mutual funds

Rohit Shah
www.gettingyourich.com

Both the government and market regulator SEBI  have been encouraging the retail investors to invest in the Mutual Funds (MFs) to mitigate the risk of a volatile market. But, there are few finer tips to invest in the MFs  which the investors should follow for a better and safer returns.

It has been witnessed that if an investor would see  volatility in the market, than he would sell out.  When the investor would needed money to buy real estate, he would sell out. When he is short of cash, he would stop Systematic Investment Plans (SIPs). The majority of investors wonder how they have missed the 'Current’ rally in the stock market.

So where do they go wrong? We frequently meet families with such an experience. We believe what most of them lack is adequately following a methodology. Here are few tips for the MF investors:

Make goal based Investments
The goal based investments bring in discipline. When an investor knows that he needs to save for his daughter’s post graduate studies in US in the year 2022, the focus on the goal allows him to de-focus on timing. Goal based investments also relieves the investor, now that he has a plan and he is actually following the plan. Making ad-hoc or lump sum investments without any goal makes it easy for the investors to withdraw the investments as there is no purpose.

Regularly invest through Systematic Investment Plans (SIPs)
Investor loves to time the markets. Valuation of the Sensex is a common man’s discussion point. We know of clients who have been waiting for years to invest in Mutual Funds ‘once the markets are down’. SIPs work on Rupee Cost Averaging principle and helps the investor to average out the price. When an investor is going to exit in 2022 at a Sensex of say 50,000 points, does it matter so much whether he or she enters at Sensex of 22000 or 23,000?

Consider risk profile and available budget
Do one invest in a Mid and Small Cap or Large Cap? Should an investor invest for a Banking Sector fund? How much monthly saving is needed to meet one’s goal and if there is a gap with the available SIP budget, how to bridge that? Looking at the investor’s risk tolerance will help the investor to get a direction. One should look at the fact sheet of the fund and understand the investment objectives of the fund.

Review MF portfolio and take actions
It has been witnessed that most clients fail here. One should look at the MF portfolio once in a quarter or at least once in a six month. One can follow Traffic Light Reporting System, famous in the Corporate world. Every MF scheme should be rated as Red, Yellow or Green. Red means Sell, Yellow Means Hold what the investor has but don’t buy incremental and Green means Buy. The investors can visit websites like valueresearchonline.com, moneycontrol.com and Morningstar.in to check the performance of the funds.

Selling too early or too late
When equity markets fluctuate, most common investors pull out. Goal based investment framework, understanding of how SIPs work and regular monitoring of the portfolio will give the investor the conviction to stay on even during difficult days. It’s very common for investors to periodically sell off accumulated holdings in Equity MFs and invest in Real Estate. The investors should review his asset allocation before taking such steps. On the other hand, it has been seen that the investors adopt ‘Buy and Hold’ strategy with no changes in the MF portfolio for years. This again, may not work.

The start of the new financial year is a good time to set one’s financial priorities. So, the investor should review the goals and investment budget. He should get started off on few good quality funds and invest and review regularly.
 
The author is a CEO at www.gettingyourich.com

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