Mutual funds (MFs) pack a promising collection of bonds, assets, stocks, bonds, and money market instruments. While MFs are popular investment avenues, choosing a suitable fund scheme to earn market-beating returns can be tricky.
The good news is that how-to of investing in MF schemes can help. In this article, let us look at some tips to invest in mutual funds to ensure you have a rewarding investing experience.
Set an investment goal
Do I want to grow my wealth as a cushion of a corpus to fall back on? Do I have a short-time goal; is it negotiable? Do I want a safety net for a comfortable retirement?
Before you start investing, ask yourself these questions and establish a clear financial goal. If you want to make your idle money work for you, these answers will adjudge the investment choices you make.
Understand your risk preference
Investments, be it in debt or equity funds, are always accompanied by some risks. While equity funds are subject to fluctuations in the stock market, interest rate value can impact your debt fund corpus. And that is just one example.
So a critical mutual fund investment tip would be to assess your risk-bearing capacity. MF schemes cater to all types – aggressive, conservative, and moderate-risk taking investors. Before choosing a scheme, you should know your risk capacity, risk required, and risk tolerance.
Map your present and future financial standing by considering your income, expenses, savings, and liabilities. This will help you understand the financial risk you can afford.
This risk is associated with the return rate required to achieve your investment objective at your present financial position. The risk required reveals a clear picture of what it would be like to invest.
Risk tolerance depicts the risk level you are comfortable with. It signifies your willingness and ability to invest while accepting the market fluctuations. You can either have high risk tolerance, low risk tolerance, or mid risk tolerance.
As a rule of thumb, you can lean more towards equity funds if you are relatively early on in your career. Because you have a longer investment horizon at this stage, you can bear market risks. The older you grow, the more should debt funds find a place in your portfolio. Especially for retired individuals who need a steady source of income, low-risk schemes are ideal.
Additional Read: How to Invest in Mutual Funds
Allocate assets properly
When you invest hard-earned funds into an MF scheme, parking them into various asset classes is a must. Why? Asset allocation can help you earn superior returns while minimising your investment-related risks.
Asset allocation denotes how you divide your investments between asset classes like shares, real estate, debt securities, gold, etc. Since the aim is to earn improved risk-adjusted returns over time, you should consider your risk capacity, financial standing, and investment horizon before investing. Here, risk-adjusted returns refer to the risk associated in comparison to the returns.
Pick mutual funds; build a diversified portfolio
When allocating assets, never put all your money in a single scheme or category. Build a mutual fundportfolio with top-rated funds that help you fulfil your investment objectives. For instance, if the market is bullish and you want to grow your money quickly, you can invest in a small or mid-cap fund to earn higher returns. Contrarily, you can invest in short-term debt funds or liquid funds for a lower risk investment to earn decent but consistent returns.
Additional Read: How to Choose Mutual Funds
While Googling “tips mutual funds” is an excellent first step towards investing, turn to professionals. Build an investment portfolio aligning with your risk appetite and investment goals with Tata Capital’s Moneyfy app. Explore and compare multiple fund schemes and invest in the ones that perfectly suit your financial vision!