10 Commandments for investing in Mutual Funds

Mutual Funds are a good investment option, especially for those with limited knowledge, time and money. Though Mutual Funds account for a mere 3% of the total market cap as against 22% of direct stock holding by individual investors in India, retail investors have developed trust and comfort level with Mutual funds and the mutual fund industry continued to gain on assets under management, hitting a record average AUM of Rs 13,58,559 crore for the quarter ended March 2016. Although investing in Mutual Funds is relatively easier than putting money in equity markets, it is still important to know certain key factors to safeguard your hard earned money.

To help you understand these key factors, here are the 10 commandments for investing in Mutual Funds.

  1. Common mistakes to avoid

While making errors is human, there are errors like those listed below, which tend to get repeated over and over again.

  • Having no investment plan to fall back on.
  • Speculating rather than investing.
  • Believing that a fund with a low NAV is cheaper than the one with a high NAV.
  • Investing in NFOs because they are available “at par”.
  • Stopping or pulling out investments when markets are uncertain.
  1. Take a personal risk assessment

Every investment has the potential of either increasing or decreasing in value. It is thus very important to clearly know your investment goals and analyze the risks that you can afford to take. Your investment pattern should depend upon your age, existing assets, personal risk assessment and when you want your investments liquid. There are online calculators that you can use to know your risk profile.

  1. Be clear about your reasons for investing

All investors have an objective for investing money – while it could be a retirement plan for some, for some others it might be a feasible avenue for funding their child’s college education. However, it is important to stick to the objectives of your investments and not lose sight of your goals. The trick is to allocate a larger chunk of your monetary resources to these goals, while keeping some aside for any emergency requirements.

  1. Complete your research before you invest

While tips and advice can be used as a starting guideline, investments without doing your own research would amount to speculation. The expected returns, expenses, taxes, optimum investment periods, and risks differ with different categories of MFs. Here, you need to study each category carefully and invest only after a thorough understanding of which fund would best suit your risk profile. The Fund Manager has the expertise to run the fund with specific objectives as published in the offer document and SEBI strictly watches that fund managers operate on those objectives alone. The SEBI also mandates that investors have knowledge of every fund, and know how to rebalancing one’s portfolio, etc. With more than 2500 funds available it’s very confusing for an investor to choose a fund suitable for him. Also, most people invest and forget about MFs so they stay invested in funds whose performance is down. This is precisely why Robo advisers like FundExpert exist. They assess an investor’s risk, age and other parameters and choose the right funds for them. The Robot watches the market 24×7 and will rebalance, sell and optimize your portfolio for you.

  1. Invest in funds with proven track record

You select the school for your child based on its previous performance record – why should investing in a MF be any different? However, do not make the mistake of looking at the returns on funds in isolation. Instead, compare these returns against a benchmarked return, along with evaluating the category average returns. While there is no guarantee, funds which have performed well over the years will generally continue to do so. This is also where FundExpert comes handy. Since our algorithms continuously watch the MF performance and rebalance your portfolio, only the best performing funds at that time will be chosen for you.

  1. Never put all your investments in one type of fund

Like in the case of never putting all your eggs in one basket, you should also spread your investments across different types of MFs. The key lies in a sensible diversification of your portfolio; distributing your investments across a wide range of investment options helps mitigate risks.  You may like to add different types of funds available for investments to your portfolio along with MFs– commodity funds, equity funds, sector funds, bond funds, balanced funds and many others. Find the right mix based on your risk profile.

  1. Maintain a proper SIP

A proper systematic investment plan (SIP) that falls in line with your risk profile is just a disciplined way of investing for long term wealth creation. Plan and maintain a proper SIP based on your investment goals. The key here is to continue with your SIP even during volatile market phases. Your long term goals are unlikely to get affected by short term market volatility; so have faith in your investments. You will get your returns at the opportune time.

  1. Put some investment into Balanced and Liquid Funds

Whatever be your risk profile, it makes sense to put some part of your investments into balanced funds. Investing in debt and equity, a balanced fund, protects your investments from market volatility, interest rates, income tax, inflation and wrong asset allocation. So, look for a mutual fund that invests in this kind of a balanced fund for getting home more lucrative returns. For the top 5 fund for 2016 look at this page. Also, when you have a sudden influx of cash or surplus or you have time to pay your EMIs and your cash is lying idle, you should invest in liquid funds. Liquid funds are debt mutual funds that invest your money in very short-term market instruments like treasury bills, government securities and call money. They are least risk, low volatile instruments. Most brokerage firms never sell them because they are very short term and the broker cannot make a commission on such funds. Brokers like to tie up a client for either long term or big capitals, so they conveniently omit suggesting Liquid funds.

  1. Do not ignore index funds

Data collected over a decade shows that passively constructed stock indices have outperformed nearly 75% of all actively managed stock funds. That should be reason enough to ensure that you do not ignore index funds in your investment plans.  Investing in index funds removes all risks other than the risks of the whole stock market, in other words, the risks of individual stock movements, sector movements, manager selections, and market timings are all eliminated in the process.

  1. Keep an eye on your portfolio on a regular basis

Although investments in Mutual Funds are generally based on long term goals, it does not mean that you can invest and forget about such investments. While you need not look into the NAV every time the market fluctuates, you do need to review it periodically to ensure that the fund is performing as per the requirements of your investment plan. Corrective action, if required, is best taken only after reviewing each fund against its original investment premise. Also when the markets are bullish or bearish, funds owing to their contractual objectives and SEBI watchdog have their hands tied and end up losing money that could have been avoided. This is when active intervention from a client can ensure optimization of returns. FundExpert’s Robo Invest product eases this pain for the investor by churning the portfolios on his behalf. Our product will aim to generate higher returns during bullish phase and protect your capital by moving it out into low risk instruments when a down phase starts. Whatever phase the markets are in, Robo Invest customers will have a lot to cheer for.

The way forward

“Safe” is a relative word and no investment that you make anywhere and in anything can guarantee the safety of your principal. As with all other investments, Mutual Funds are also subject to risk and can at times provide results that are below the overall market expectations. Having said that, for an investor looking for a safer investment without worrying about where and when to invest, and an investment that can generate inflation beating returns, MFs are surely the best option available.

About the author

Arvind Daga

Share the joy


redvision says:

Your blog has always attracted me and this particular post left me speechless. It is one of the best pieces of writing I have seen. Good job.


Leave a Reply

Your email address will not be published. Required fields are marked *