It’s said that one shouldn’t measure the depth of water with both his/her feet. Similarly, enthused by any market rally, a first-time investor shouldn’t take a plunge and invest heavily in the pure equity segment of Mutual Funds (MFs), investment in which is subject to market risks.
Novice investors generally start equity investments at a high market, when the existing investors have already earned a double-digit compound annual growth rate (CAGR), oblivious of the fact that the experienced investors had invested at a lower market.
So, while entering the equity market for the first time, investors should take a cautious approach by investing in relatively less-risky funds and get accustomed to the market fluctuations.
A first-time investor should do the following while investing in equity-oriented funds:
Never make big investments in lump sum
An investor should avoid making big lump sum investments in equity. This is because any subsequent market meltdown would generate a negative notional return, which may frustrate the investor, especially if he/she is a first-time investor, who has never seen a reduction in capital invested. In such a situation, panic-stricken novice investors often decide to pull out their money, thereby suffering losses.
So, it’s always advised that investments in equity-orient funds should be made through Systematic Investment Plan (SIP).
Invest in less-risky funds
To get accustomed with market fluctuations, instead of high-risk pure equity funds, it’s better for first-time investors to invest in balanced funds having moderate risk due to exposure in the fixed-income segment. Such funds would fluctuate less than the pure equity funds during market volatility and would cause less panic for the investors and make the first-time investors stay invested for a long term.
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So, instead of starting with high-risk pure equity funds, it’s better to invest in funds, which are comparatively less risky.
Make a financial plan before investing
If an investor starts investing in equity-oriented funds with a motive to achieve a long-term financial goal derived by proper financial planning, it’s more likely that the investor would overlook the short-term fluctuations in order to achieve the long-term goal, compared to an investor who has entered the equity segment just to earn quick returns.
So, it’s better to do financial planning to decide how much to invest in which category of funds before investing.