Understanding Mutual Funds before Your First Investment
An excellent investment option for both beginners as well as experienced investors, mutual funds can seem daunting for first-timers. However, you can start your investment journey better with this article that gives a basic understanding of how mutual funds work.
Mutual Funds, Explained
Mutual funds are professionally managed investment funds that accumulate money from many investors to purchase securities, stocks, bonds, money market instruments, and other assets. A fund manager or portfolio manager, whose fees are paid for from the money in the fund, decides how to invest the money, which instruments, stocks or bonds go into an investment portfolio, and which need to be sold.
The primary advantages of mutual funds are that they provide more substantial investment capital??? , more vehicles of investments to diversify with, as well as liquidity options.
The Significance of Mutual Funds
Mutual Funds provide the right avenue for investing in a variety of market-linked instruments. For investors with higher risk-bearing capacity, equities or shares are a great investment opportunity. Investing in equities through mutual funds is an excellent way to rake in higher returns, but with much lesser risk.
Why Mutual Funds Are a Popular Choice with Investors
While there are plenty of views on what you should be doing with your money, here are some reasons why mutual funds should certainly be a part of your wealth building portfolio:
• Ease — Mutual funds are easy to buy and sell and provide access to an extensive choice of financial instruments, sectors, and strategies.
• Convenient — Mutual funds are convenient in that, by investing in a single fund, you can gain access to a comprehensive range of the financial market.
• Lesser Effort — Individual investors usually expend a lot of effort, transaction costs, and time to create a large capital stock portfolio, for instance. With mutual funds, you as an investor can spread out the investment fund across multiple large-cap stocks in a single transaction.
• Lesser Lock-In Time — Almost all traditional investment avenues have long lock-in periods. In times of emergency, it is difficult to get your money out. Mutual funds have less or no lock-in periods, giving you the freedom to redeem your money when you need it.
• Less Hassle — On their own, investors often lack the confidence to invest in the financial market to grow their wealth. This could be due to inadequate competence to invest in stocks and bonds on their own or lack of time to track their investments.
Types of Mutual Funds
Based on maturity and objectives, mutual funds can be differentiated as shown below.
Mutual funds based on maturity:
• Open-ended funds
• Closed-ended funds
• Interval funds
Investment objectives-based mutual funds:
• Equity funds
• Debt funds
• Balanced funds
• Liquid funds
• Tax saving funds
• Index funds
• Sector-specific funds
New Investor? Here’s A Handy Guide for You
If you are a first-time investor, invest in line with your financial objectives after drawing up a thorough financial plan. Here are some mutual fund investment tips that any new investor should keep in mind before investing in mutual funds:
1. Setting an investment goal: Investing in a random way without any focus will not put your savings to good use. An investment without financial purpose is a venture you should never really begin. Your investment goals should be S.M.A.R.T. (Specific, Measurable, Adjustable, Realistic, and Time-bound) — helping you decide how much you can invest in mutual funds, with your risk appetite in mind.
2. Identify your risk profile: Knowing your risk capacity is measured based on various factors such as your age, familiarity with financial products, investment capacity and objective. Consider the risk involved in the investments against your risk appetite. Remember not to get swayed by the high returns of an investment product.
3. Picking the right mutual fund: For first-time investors, an index fund or a balanced or -might be a good bet as it comes with lower risks while optimising returns. When faced with several mutual fund schemes, you need to select the one that has performed well steadily for at least 5 years.
4. Asset allocation: Choosing funds as per your risk profile is not enough. A portfolio of funds will help you diversify across instruments like such as equity, debt, gold, and real estate. This is a great investment strategy that will balance your risks without bringing down your entire portfolio.
5. Invest in long term SIPs instead of lump sum investments: Systematic Investment Plan (SIP) is better for newbies if investing in equity or equity-oriented funds. It’s better to have your investment correct than timing it wrong. A lump sum investment can put you at risk, whereas an SIP allows you to spread your investments over time and invest at different market levels, helping you earn higher returns in the long run.
How to Reduce Risk in Your Mutual Fund Investments
Mutual funds are invested in a variety of financial vehicles like equities, debt, corporate bonds, and government securities, the prices of which fluctuate owing to factors like supply-demand, change in interest rate, inflation, and so on.
Owing to the above adverse possibilities, it is important to remember that although mutual fund performance is always subject to various risks, every portfolio manager strategizes to curtail — these well-known risks. As long as you have shopped for a portfolio manager with diligence, selected funds with a proven track record and made the investment with long-term benefits in mind, you are well on your way to grow your wealth.
Besides ensuring that you hire the right fund manager, you could set about learning all about financial management yourself through a mutual fund beginner course and other mutual fund online courses that combine knowledge with practical application through self-learning modules. All the best for your journey ahead!
