Mutual funds have always been a preferred choice for mature investors. More and more people are investing in mutual fund schemes to meet their financial goals. Often first-time investors are confused and hesitant on how to go about with the investment. It is essential to choose the right schemes so that you can get expected returns.
Here are a few important tips to help you make the right decision when investing in mutual funds.
Evaluate Risk Appetite and Expectation
Before investing in mutual funds, you must assess your risk appetite and expectation of investment returns. Accordingly, select the mutual fund scheme that helps you achieve your identified financial goals. For example, suppose you want to build a certain corpus size in the next ten years, and your risk appetite is high. You can choose a mutual fund scheme that can offer you high returns corresponding to your risk appetite and help you build the desired corpus to achieve your financial goal after ten years. Depending on your risk appetite, identify how much you need to invest in a mutual fund scheme to achieve a particular financial goal.
Diversify Your Investment
Investing an entire fund in one or two mutual fund schemes can expose your portfolio to higher risks. Ideally, you should diversify your investment portfolio into different mutual fund schemes and across different mutual fund companies.
Adhil Shetty, CEO, Bankbazaar.com suggests, “An adequately diversified portfolio can significantly reduce portfolio risk. However, it would help if you avoided over-diversification as it can erode your portfolio returns. Always diversify to the extent the portfolio risk comes down to your risk appetite range without compromising the expected returns on the investment.”
Selection of The Scheme
There are many mutual fund companies, each offering many schemes. Are all good for investment? How to decide the best scheme to invest your money in? Before investing in the mutual fund schemes, you must check their past performance, management efficiency, and expense ratio and compare the schemes online to identify the ones that have the potential to offer you a consistent return. Prefer direct plans over regular ones as they have a lower expense ratio.
Lumpsum Vs SIP Investment
If you plan to invest a lump sum amount, you may not want to take a higher risk. So, an appropriate debt fund can be a good option. If you are willing to take moderate risk for a better return, you may invest in a balanced fund. For higher returns, you have to take high risks. So, you may go for investment in a large-cap equity fund. Diversify your fund across different schemes and different mutual fund companies. If you want to reduce the risk further, you can park the lumpsum fund in a liquid fund and use the STP option to invest the money in a staggered manner in an appropriate mutual fund scheme.
If you are planning to build a corpus while investing in instalments in the long term, you can invest through a systematic investment plan (SIP) in the appropriate equity fund in sync with your risk appetite. SIP can help you earn an attractive return, especially when you invest for the long term amid the volatile market.
Review And Rebalance Your Portfolio
When you invest in mutual fund schemes, you should review your portfolio from time to time and check how your investment is doing. Sometimes it may lag behind your expected level of performance; sometime, it may do better than your expectation. If it falls behind your expectation, you may need to switch investments from the underperforming funds to better ones. On the other hand, if your portfolio has significantly outperformed your expectation, you may need to rebalance your portfolio by switching investments from a high-risk scheme to a low-risk mutual fund scheme and secure the return already earned.
Finally, you should check the tax implications of short and long-term investments in different types of mutual fund schemes before investing. Start investing in mutual funds at an early age. It can help you maximize the return on investment by staying invested for a longer term.