Making mutual fund investing is one of the most favored ways to create wealth, especially for beginners who want to have exposure to financial markets. Mutual funds are a collection of stocks and bonds managed by investment professionals. If you are planning to start investing in mutual funds be prepared to take these important broad steps – having necessary documents in hand, knowing the purpose of investment and selecting the right mutual fund schemes.
However, beginners in mutual fund investing need to know few more things to help them take a right decision. Here is a list of things you should know:
Know your purpose of investment
The purpose of doing an investment should be well defined – buying a car, buying a home, child education planning, wedding planning, retirement planning, etc. Even if you don’t have any goal, you should be clear on how much wealth you are targeting to create and in what time frame.
“Always decide the “purpose of saving” and “year when you need your money back”. This will help in filtering various mutual fund options basis – risk level, lock-in period, payment method, etc,” said Anjaneya Gautam - National Head, Mutual Funds, Bajaj Capital.
Keep documents handy
Every transaction you make needs to be well documented. The first thing you need is to become KYC compliant. This is nothing but a due diligence of your personal details like the submission of the address proof, your photograph, date of birth certificate and your PAN card. Gautam added that you need to fill up the form of respective scheme where you are going to make your investments. If you have a PAN card, you are qualified to invest in Mutual Funds. “An Aadhaar card can make account/folio creation easy through completely paperless e-KYC, else one-time paper KYC process can also be done,” he said.
Risk factor should always be considered
If you are a new investor, you need to know that there are several types of mutual funds available in India based on catering one’s risk appetite. One should select the scheme as per their risk-taking capacity. “Remember, higher return expectation means associated risk. Mutual Funds possibly have an answer to all investment needs. Choose wisely, it is your money and your future,” said. Gautam.
“You should think about your exposure to equities in a simple way. If you’re not comfortable with the value of your equity investments falling, then you shouldn’t be in euities at all,” Kunal Bajaj, Founder & CEO, Clearfunds.com.
Selection of scheme and mode of investment
It is always advisable to plan for long-term financial goals. “One should take the help of a qualified mutual fund advisor. They can list down schemes (Liquid, Debt, Hybrid or Equity), option (growth, Dividend Payout or reinvestment), strategy (SIP, Lumpsum, STP, SWP, etc.) as per your preferences,” said Gautam.
Do not only chase past performance of a fund
Anil Rego, founder, and CEO, Right Horizons said that past performance is not a guide to future performance. For instance, look at pharma and IT funds that were among the best wealth creators in previous 5 to 10 years but are down in the last 1 year. What any fund has earned in the past is no guarantee for what it will generate in the future. However, the past returns can be a good starting point to select a mutual fund. A fund that has performed well in the past has a better chance of performing well in the future as well, as compared to a fund that hasn't done so well historically. “Investors should actually study how a fund has done over various market cycles. The returns tell you how good is the fund manager both during up, down and volatile times. If a fund has consistently beaten its benchmark and category average, that is a great fund,” he said.
Select while the option
Selecting options - Dividend or Growth - becomes very important when you are defining the purpose of your financial goal. If you aim to fulfill a goal where you need a huge capital, you should opt for growth option whereas if you need some profits from time to time as and when a company gains from the market, you should select dividend option.
“Many mutual funds choose to distribute their profits to shareholders in the form of dividends, while others choose to use their profits to reinvest in the growth of the company. Your selection of dividends or growth plans should be based on how often you need the money,” said Bajaj.
Have a balanced portfolio as per your age
One needs to check the time horizon of their financial goal and invest accordingly. However, there is no hard-and-fast rule, but in general, as you get older and closer to retirement, you should reduce your exposure to stocks in order to preserve your capital. “As a rule of thumb, subtract your age from 110 to find the percentage of your portfolio that should be in stocks, and adjust this up or down based on your individual willingness to take risks,” said Bajaj.
Finally, keep the costs low.
Bajaj said that when possible, pick a direct plan. Every mutual fund in India comes in two flavours: Regular – where a regular commission is paid to your bank or advisor, out of your investments; and Direct – where no commission is paid to anyone. “When you buy a direct mutual fund, the commission saved is added to your wealth, which means more for you and your family, instead of your advisors,” he said.
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