Investing in Mutual Funds - What you need to know?
Mutual Funds are increasingly becoming the preferred investment option for retail investors who don’t have the time and knowledge to compete and make profits from the dynamic stock market that changes every day. So for such people its naturally a good idea to opt for Mutual Funds. But the key challenge is to choose the right fund. Here also you need to do a bit of reasearch and understand your specific goals, time duration, risk apitite etc. before making a good decision as to what fund suits your needs. Following are some rules to help invest better and attain your financial goals.
What kind of Person are you? First of all, you need to know yourself - your financial goals, how much risk you can take, your investment duration, your short, medium and long term liquity needs etc. You have to do a tolerance test for yourself. If a sort term loss of 40% or so upsets you, even though your long term prospects looks good, an aggressive equity fund is not for you.
You Need to do Reality Check: What are your goals? If you need to triple or quarruple your investment in two years, a medium term bond fund may not be the right answer. Work on setting realistic expectations for both your goals and your funds. Understand that the more returns you expect the more risk yu have to take. So you need a clear understanding of your risk taking capability. If you are young and have a stable income with less liabilities and have enough savings every month, then think of long term investments and invest in SIP manner in equity funds. If this is the case you can take risk and opt for high growth investment funds.On the other hand, if you are nearing retirements and looking for stable and guaranteed returns, you may have to choose conservative large cap funds.
Understand What You Are Buying: Once you discovered yourself, spend some time for a close understanding of the funds. The stated objective of a fund as given in a prospectus is often incomplete and does not reveal much. Based on the readily available portfolio and fund manager’s commentary, you can broadly understand the style and strategy followed by a fund. This will help you meaningfully diversify your portfolio. This will also help you assess potential risks. In general, large-cap value funds are less risky than small-cap growth funds.
Examine the Sectors: It is always better to go for funds that invest in diversified sectors. If you put all your stakes in one of very few sectors, any negative economic impact of those sectors might hurt your fund. Also understand what sectors will have the potential to flourish and prosper in the future so that you don’t miss on them. Don’t get emotionally attached to any sectors. As the dynamics of the economy changes the new sectors might become starts and old leaders might fade.
Understand your Fund’s Concentration and Portfolio: A portfolio with just a few stocks will likely be more volatile than a fund that’s spread among hundreds of stocks. But there could be rewards of concentration. A concentrated portfolio will also get more returns for your investment if the stocks work out. You may want to add a concentrated fund, one that owns fewer stocks or puts most of its assets in the top 10 or 20 stocks, to your portfolio. It all depends on your risk apatite. Generally, the most diversified your portfolio, the more stable your fund becomes. So your core funds should probably be well a diversified and more predictable. Though a small allocation to a sector-oriented fund, a more-flexible fund, or a more-concentrated fund could boost your returns.
Periodically Assess Performance: As the rule says, the past performance is no indicator of future results. Stock market is so dynamic that the boom in your sectors and stocks will often be followed by busts. Hence your should access the performance of your funds every quarter. When choosing a fund, look for above-average performance, quarter after quarter, year after year.
Have Discipline: Don’t get over excited or depressed about day-to-day performance of your fund. Ups and Downs are natural in equity markets. As long as the long term prospects are good, there is no need to worry about short term losses. And these situation might offer buying oppurtunities. Have a long term view.
