People with such questions either resort to friends and/or family for answers or
simply follow the herd and opt for the more popular schemes. This is a dangerous
ploy since one wrong decision can lead to potential financial losses. Hence, it
is imperative that investors seek clarity before investing their hard earned money.
Here are five pointers to help such investors invest in Mutual Funds:
- HAVE AN INVESTMENT GOAL AND STICK TO IT
Why are you investing? Is it for your retirement? Or Children’s education?
Or buying a house? Regardless of the reasons, having an investment goal is the first
step on the ladder of a successful investment cycle. It gives the process of investment
sanity and enhances focus of your efforts. Also, it protects you against mindlessly
falling for the next popular investment option.
Money is not the goal. Money has no value. The value comes from the dreams that
money helps achieve. - Robert Kiyosaki – Author of ‘Rich Dad Poor Dad’
Once you align a dream or a goal with your financial plan, you will be more focused
and determined to make it a success. Also, it will help you align your investment
timelines to the duration left for your goals. In a market which is largely dependent
of investor sentiment, having a practical approach usually begets good financial
decisions.
- CHOOSE YOUR FUNDS METICULOUSLY
Once you have set your financial goals and time horizons, you need to spend some
time assessing the amount of risk you are willing to take. Remember, all market
investments are subject to some amount of risk. Additionally, risks are directly
proportional to returns, meaning higher the risk – higher the return and vice-versa.
Understanding your risk preference will help you narrow down to the asset class
that you might want to consider.
For example, if you are comfortable with a slightly higher risk, then you might
want to consider equity oriented funds. Investors with relatively lesser risk preference
usually opt for balanced or diversified funds and those with low risk preference
choose debt funds.
Once you are clear about the asset class you want to invest in, then you can start
looking at various schemes investing in the specific asset class.
- RESEARCH – ANALYZE – RESEARCH
Investing in the mutual funds needs a good understanding of what the scheme offers.
This involves time spent on studying the Scheme Information Document (SID), published
by all funds. Look at the investment objective, current portfolio and historical
as well as annualized returns in both bullish and bearish market cycles.
The fund manager is of utmost importance since he/ she ensures that the fund performs
well and takes critical decisions about the allocation of funds in the scheme. Go
through his/ her performance record to see how the funds managed by him/ her have
fared in the past.
Ensure that you are in sync with the scheme’s approach to earning returns
before investing.
- DON’T STOP AFTER INVESTING – MONITOR REGULARLY
Most people argue that the idea of investment is to generate passive income so that
they don’t have to spend more time monitoring it. This idea stems from the
age-old habit of investing in bank fixed deposits. However, unlike FDs, market based
investments like mutual funds require you to regularly monitor the performance of
the funds that you are invested in.
This is beneficial in more ways than one. The market is a highly volatile place
with prices of assets fluctuating based on a wide range of parameters. As an investor,
it is impossible to keep track of all these parameters and hence reviewing and monitoring
your portfolio is important. Each fund has a benchmark calculated by analysts and
experts from the fund house. As long as the fund’s performance is comparable
to the benchmark, your investment will generate returns around the anticipated mark.
However, if you find that certain schemes are underperforming, then you can choose
to exit the fund and invest in more promising schemes within the same asset class.
- KEEP THESE FACTORS IN MIND WHICH AFFECT THE PERFORMANCE OF YOUR MUTUAL FUND
INVESTMENT
Performance of a mutual fund investment depends on a wide array of factors. While
keeping a tab on each of them is not possible, understanding their impact can help
you make informed decisions before and after investing. Some such factors are:
Performance of the underlying assets – A mutual fund invests
in assets – be it equity or debt – and the performance of the fund is
primarily affected by the performance of these underlying assets. So, if you have
invested in equity oriented funds, then a rise in the share prices will result in
a rise of the NAV of the scheme and vice-versa. The additional benefit is that since
a fund invests in multiple shares across a sector and/or multiple sectors, the impact
of a fall in the asset prices is lesser as compared to an investment in the asset
itself.
Performance of the sector/s – Some funds are focused on certain
sectors. The performance of these funds is affected by the rise or fall of the specific
sectors. So, if you have invested in a scheme that invests primarily in Energy stocks,
then a drop in the prices of crude oil can have a negative impact on the NAV of
the scheme. Or if you have invested in Index funds, which mirror the performance
of a market index, then the NAV moves with the movement of the index.
Fees and charges –Apart from the performance of the assets, the returns from your mutual fund investment also depend on the applicable fees and charges charged by the fund house for managing your funds. This is known as the scheme’s Expense Ratio which is mentioned in the Scheme Information Document (SID). This fee is deducted from the amount invested by you.
Overall performance of the fund –Any fund manager can work
wonders with the funds, provided investors stay invested and redemption of units
don’t force him/ her to sell assets at a time when the market is down. On
the other hand, if redemption requests are lesser, then the fund manager has more
opportunities to invest in assets which can generate good returns. Avoid funds which
have a high rate of redemption.
Macro-economic factors – The macro-economic factors of a
country play a huge role in ascertaining the future of an economy and the financial
markets. Some of these factors include population, global market movement, inflation,
etc. Not much can be done about these factors but being aware can help make the
right decisions when the time arises.
