Are you looking forward to investing in mutual funds for the first time? Well, there are some things you should know before starting.
Mutual funds are one of the best financial instruments that can help you make your idle money grow. However, they aren’t a get-rich-quick scheme. You must remain consistent and patient for a few years before you can reap your rewards.
It is also crucial to understand how mutual funds work and pick the right one. You may find the sheer volume of mutual fund schemes overwhelming. So, you should figure out which one is right for your financial goals before you even invest a single Rupee.
These doubts and confusion are common for every beginner investor. To become an informed investor, here are five questions you should ask.
#1 What is my risk tolerance?
‘Risk tolerance’ means much risk you are willing to take. Are you okay with your investments’ value decreasing in the short term? Or, will you pull out your funds as soon as the market starts showing a downward trend?
Risk tolerance varies among investors. If you feel afraid of losing money, you should invest more in risk-free instruments. But, if you think that your investments aren’t returning much, you can stretch your portfolio to include high-risk investments as well.
#2 What can I expect if I invest in the market?
Remember the old refrain about mutual funds investments being subject to market risks?
All investments have some degree of risk. Mutual funds are affected by forces like consumer trends, political events and even natural disasters. High-risk also means high reward, but the crucial factor here is time. So, mutual funds are best for investing for 7 to 10 years.
Additional Read: Investment Strategies for The Lump sum/ One Time – High-Value Investor
#3 What is the best way to invest in volatile markets?
The best way to invest in volatile markets is through a Systematic Investment Plan (SIP).
Why? You can start with a small amount, increase or decrease the amount if you wish and initiate more than one SIP in the same fund. However, the most attractive benefit of SIPs is Rupee-cost averaging.
When you invest through a SIP, you pay the same amount no matter how the markets are at that point. So, when they are high, you purchase fewer mutual fund units. And when they are low, you purchase more units. Over time, you lower the total average cost per unit of your investment.
#4 How can I minimise my risk when I invest?
Don’t put all your eggs in one basket!
The best way to minimise risk is to ensure your portfolio is well-diversified. You can have several investment avenues, asset classes, sectors, etc. Each of these investments reacts differently to economic events. And so, you can protect your money in a crisis.
Additional Read: Why Passive Investing Makes a Lot of Sense for Long Term SIP Investors
#5 What is the number one rule in investing?
Always keep your time horizon in mind. You should never invest money in mutual funds that you cannot afford to lose in the short term. This means that it’s wise to choose debt mutual funds if you want to invest your money for short term.
Do you want to assess your risk profile and pick the right funds for your financial goal? With Tata Capital’s Moneyfy app, you can do so from the comfort of your home.
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