Mutual funds are a popular avenue for investing. Often, people invest in them without adequate knowledge. There is enough stuff written about mutual funds in general. However, there are certain unpopular aspects that we propose to address in this article. Here you go!
1. Returns from mutual funds vary:
Mutual funds are linked to market performance and are influenced by various factors, including the skill of the fund manager, the fund’s objectives, the types of securities held in the fund’s portfolio, and overall market conditions.
As a result, the returns on a mutual fund can fluctuate from year to year and may differ from their peers. Additionally, mutual funds are subject to market risk, meaning their value can fluctuate in response to market conditions.
2. Always look for funds with consistent performance:
Consistency in performance is essential in mutual funds because it indicates a fund’s ability to produce returns for investors over time consistently. Funds with a consistent performance history are more likely to continue to perform well in the future, whereas funds with inconsistent performance may be more risky and unpredictable.
Additionally, consistency in performance can also be used to compare funds and assess their risk and potential for returns.
3. Different mutual funds have different risk levels:
Prior to investing, it is critical to assess risks associated with the fund. Several factors contribute to a mutual fund's risk level, including the types of securities that the fund invests in, the fund's management and strategy, and the overall market conditions. A mutual fund riskometer can assist you with it. Typically, investment decisions are made based on an investor’s risk tolerance levels.
Generally, mutual funds can be categorised into three primary risk levels: low, moderate, and high.
a. Low-risk mutual funds, such as bond funds and money market funds, invest in relatively stable securities and aim to preserve capital.
b. Low to moderate mutual funds fall between the low risk and moderate risk categories. Income funds which have slightly higher risk profiles than low risk mutual funds fall in this category
c. Moderate-risk mutual funds, such as balanced and target-date funds, invest in a mix of stocks and bonds.
d. Moderately high risk mutual funds are funds which fall between moderate risk and high risk mutual funds. Slightly aggressive balanced equity mutual funds or even large cap equity mutual funds could fall within this category
e. High-risk mutual funds, such as equity funds, invest primarily in stocks and aim for high returns.
f. Very high risk mutual funds, such as sector funds and thematic funds, which have a high concentration towards fewer sectors or theme-driven stocks
4. SIPs help you invest consistently and reduce risk:
Systematic investment plans (SIPs) can create a discipline in investing by allowing individuals to invest a fixed amount of money at regular intervals rather than making one significant investment. This can help individuals save and regularly invest, leading to better long-term investment outcomes.
Additionally, SIPs can help individuals stay invested during market fluctuations, which can be beneficial for achieving long-term investment goals and potentially reduce risk through rupee cost averaging.
5. Asset allocation and geographical diversification is something you cannot ignore:
Asset allocation is important because it can help to diversify an investment portfolio and manage risk better. By spreading investments across different asset classes and geographies, such as stocks, bonds, commodities and cash, investors can reduce the overall risk of their portfolios.
Additionally, different asset classes may perform differently in various market conditions, which can provide a buffer against market downturns. This strategy can help balance a portfolio’s risk and return and lead to more consistent returns over time.
6. A lower NAV does not mean a cheaper fund and better opportunity:
A lower net asset value (NAV) does not necessarily mean a fund is cheaper and is a better opportunity to invest. The NAV is simply the total value of a fund’s assets divided by the number of shares outstanding. It is used to determine the price at which shares in the fund can be bought or sold.
A lower NAV may indicate that the fund’s performance has been poor, but it could also be due to several other factors, such as an increase in the number of units outstanding or a decrease in the value of the fund’s assets.
It is essential to evaluate a fund’s performance over time and to consider other factors, such as its management, fees, and investment strategy, before deciding to invest.
7. Remember not to panic when the market is down:
It is often seen that investors tend to panic during a downtrend in the market. They offload their investments during such time. Redeeming mutual funds when the market is down can result in selling at a loss, which can be detrimental to your investment portfolio.
It’s important to remember that the value of mutual funds, like the stock market, fluctuates over time. It’s better to hold on to your mutual funds for the long term, as the market tends to recover over time, and selling during a downturn can lock in losses.
Additionally, mutual funds are generally best suited for long-term goals, such as retirement, and redeeming them prematurely can impact the ability to reach those goals.
8. Don’t stop your SIPs during a downtrend in the market:
Stopping SIPs (Systematic Investment Plans) during a downtrend in the market can be detrimental to an investment strategy because it goes against the principle of rupee-cost averaging.
Rupee-cost averaging is the practice of investing a definite amount of money at a predefined interval for a specified duration. By continuing to invest during a downturn, an investor can purchase more units of the investment at a lower price, which can lead to a lower average cost per unit and potentially higher returns in the long term.
Additionally, stopping SIPs during a downturn may cause an investor to miss out on potential rebounds in the market.
9. Investing without a financial expert may not be prudent:
Investing without a financial counsellor can be imprudent because it can lead to a lack of diversification in one's portfolio and a lack of knowledge about the specific mutual funds being invested in.
A financial expert can help individuals determine their risk tolerance, investment goals, and time horizon and create a diversified portfolio of mutual funds that aligns with those factors.
Additionally, a financial counsellor can provide valuable insight and research on the specific mutual funds being considered for investment, including information on past performance, fees, and management teams. Without this guidance, an individual may make imprudent investment decisions.
If you are looking for expert advice to help you in your investment journey, then you can consult the wealth management team of Tata Capital for further assistance.
14 February 2023
6 mins read
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