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Are Mutual Funds right for ME?

Are Mutual Funds right for ME

I'm sure you would have read thousands of articles on Mutual Fund Investments while designing your portfolio. Some would have had very detailed discussions with their financial advisors on what works best for them. 


There has to be some common principles that each one of us need to follow when looking to invest in mutual funds. Before investing ask this question to yourself -


Why should i invest in a Mutual Fund?


This might sound stupid, this is where 80-90% of the people go wrong. They do not understand whether Mutual Fund investments suits their profile?
 


Let's get to the fact. Most of the mutual fund investments are made because someone told you to invest, and showed you past returns. Now, if that is your idea of investing, you have gone totally wrong. Here's why - Chasing past returns in a mutual fund might be bad idea

This someone could be your friend, relative or even TV commercials - I'm sure most of you would have seen Mutual Funds Sahi Hai advertisements very regularly.


Look at the trend of mutual fund inflows in the last one year. Equity markets were at their peak starting year 2017 till Jan' 2018 - the equity fund inflows were at their peak. The market started showing bearish trends from Feb' 2018 & equity fund inflows have started declining. Every month we get to read such articles - Equity mutual fund inflow slumps 59% to Rs 6,657 crore in March


Now if you are an Intelligent Investor, no i'm not comparing you to Benjamin Graham - consider that you invested at high value & redeemed at low value. That doesn't seem to be a well thought and educated decision.


Investing in equities is like investing in a business. If you believed & invested in a business - would you just get out of it because it's value is down 5, 10,20 or 30%. If you did, then you never believed in the business. That's where you went horribly wrong.


Ground rules if you wish to invest in Mutual Funds


Looking to make new investments into Mutual Funds? Just ask these two questions to yourself?


  • How much risk can i afford?
  • How much time can i give to my investments?
Let's get to the first question. 
  • If your answer is - No Risk, i want steady returns - then equity mutual funds are a big NO. There is another category for you - Debt funds or Arbitrage Funds. What are Arbitrage Funds? Returns, Risks, Taxation
  • If your answer is - Not Much - I'm a bit conservative - then incline your portfolio towards Debt, Arbitrage and Large Cap Funds. You need to diversify - How to diversify your mutual fund portfolio?
  • If your answer is - Yes, i want maximum returns and can take risks - then mid & small cap based funds are your best friends. Yes, they can be more volatile than large cap funds - but can offer handsome returns if you have given enough time.
Now, the second question.
  • For debt, liquid, arbitrage funds - you could choose short term horizon. But consider post-tax returns from your investments. Each category of funds are taxed separately. Here's your guide - Mutual Fund Taxation in India - How are mutual fund gains taxed?
  • For equity funds, specially large caps - Give atleast 5 years. Yes, that's the rule any equity investments directly or through a fund is a gamble unless you give it atleast 5 years.
  • For small & mid cap investments - Give atleast 7 years. If you study small & mid cap index - they tend to fall more than a large cap fund & can be very volatile in short term. The more time you give to your investments, the better compounding returns you will enjoy.
The other most important aspect to be kept in mind while making investments into mutual funds is Systematic Investment Plan or SIP.  Read here in detail - SIP - The magical recipe for financial success.

Always make equity investments through monthly systematic investment plan. This not only brings discipline to your investments, but also provides rupee cost averaging benefits.  Continue your investments even when market is volatile or down. Never forget, you will get more fund units when NAV of a scheme is down.

For other debt, liquid or arbitrage investments - you may choose lumpsum or SIP.

Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at www.mutualfundssahihai.com

Still have any questions or feedback on the article, don't forget to share it in the comments section below.



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