The funny thing about financial education is that it's almost never formally imparted to most people. We learn everything from algebra to geometry, but most of us never get to know how to save money or invest money or grow our wealth.
Therefore, it’s no surprise that most new investors find themselves in a tricky situation when it comes to investing money. We’re thrown face-first into a whirlpool of financial jargon and, more often than not, our Google-based research tempts us into investing in mutual funds. But, we all know that mutual funds are subject to market risks and that we should read the offer documents carefully before investing.
But what does that really mean? How exactly should you approach mutual funds? Which are the best mutual funds to invest in? And how many mutual funds should you invest in any way?
I am often faced with such questions and these are all undoubtedly crucial questions. Especially because we work hard for our money and it’s only wise to invest it smartly. I say this because, in the case of mutual funds, half knowledge can do more harm than good.
So, here is how you as a new investor should approach mutual fund investments.
Get a good wealth coach
A wealth coach is more than just an investment advisor; he/she is someone who will look at your overall financial well-being. Understand that most people have little knowledge about mutual funds and bank wealth managers are often biased. You need to talk to a wealth coach you can trust. This is usually an independent third party who is an expert and a person who is motivated to enhance your returns. The person will give you guidance and prepare you for your financial goals beyond just investments. Professional wealth coaches are usually someone who is not affiliated to any one bank or fund. They can help you set up an emergency fund, identify the right financial advisors etc.
Consult a qualified investment advisor
While wealth coaches give general life guidance of how to first prepare for emergency funds etc., an investment advisors are regulated entities. They give specific advice on which funds to buy and when to sell. There are over 3000 mutual fund options, and many people pretend to be good advisors, but only a few have the track record to prove it. Find advisors who can direct you towards quality funds because picking the right scheme is equivalent to winning half the battle. You can identify good advisors by looking at their past experience, track record and speaking with those they have worked with earlier.
Start small and automate
Don't think of investing a big amount. It's a misconception that you need a lot of money to start investing. You can start out with a simple SIP (Systematic Investment Plan). These plans will allow you to invest in mutual funds with as little as Rs 500 a month. You can set an amount that seems reasonable, but ensure that it's not inconsequential. The exact amount depends on your risk appetite, income, financial goals etc. Don't rush into things and keep in mind how compound interest works. A simple SIP calculator can help you on this front.
Second, if you rely on your memory and proactive nature to invest, you're doomed. The best of us fall prey to investing during market highs and panic selling close to market lows. It's not something you can always control and you simply cannot time the market. Therefore you shouldn't leave investments to emotions. Automate your investments through an ECS (electronic clearance service) mandate that auto-debits a fixed amount every month/quarter. Use technology and mathematics to guide your gut instinct.
Be patient and don't think too hard
Investing is a long-term process. To put things in perspective, in the world of investments, three years is short term. So, keep that in mind when you start out. You'll have to sit back and ride quite a few ups and downs. Prepare yourself for the journey and don't overthink a simple SIP. Everyday market changes have little changes on your mutual fund returns in the long term, unless something dramatic or drastic happens. So, keep yourself educated without getting anxious or nervous at every small rise and fall. Mutual Funds will teach you that patience is indeed a virtue that pays. I highly recommend you learn this lesson at the start instead of having to learn it the hard way later.(The writer is Founder & CEO, Cube Wealth, bankoncube.com)