A Mutual Fund guide for Starters

Investing in mutual funds is primarily about managing expectations. Quite often, investors tend to have aggressive expectations from the mutual fund. Alternatively, investors expect these mutual funds to perform without their full involvement. Neither of these is going to happen. When you start out on your mutual fund journey, you must be clear about what you need to expect and what you need to do. Here are 5 stepping stones.

Understand what a mutual fund can do

The first step is to understand what the mutual funds can do for you. For example, mutual funds offer you a choice of equity, debt, liquid assets, gold, indices etc. Mutual funds are managed by expert fund managers and therefore you get the benefit of professional management of funds. Since the fund manager is managing a large corpus, you can reduce your risk by investing in mutual funds. This is called diversification. If you invest on your own, you are likely to buy just a few stocks and expose yourself to cyclical risks. The fund manager can give you indirect exposure to a large number of stocks. Above all, equity funds are your best bet to create wealth in a more organized and predictable way.

Also know what a mutual fund cannot do

You must also be clear on what a mutual fund cannot do for you. Mutual funds do not eliminate risk totally. The risk element in mutual funds will remain, whether it is equity funds or debt funds. It is just that mutual funds manage risk better. Mutual funds also will not assure returns; in fact SEBI does not permit them to assure any kind of returns. However, if you invest in quality funds over longer time frames then wealth creation will follow. Remember, it is not the job of mutual funds to time the market. It is not like you bought Eicher at Rs.200 in 2009 and then sold at Rs.30,000 after 7 years. That kind of windfall gains you must not expect in mutual funds. Only some quality mutual funds will outperform the index over a period of time.

Start with tax savings plans

That should be your entry point. You need to save your taxes anyways. With a 3 year lock in period, ELSS combines the best of return enhancement with tax exemption under Section 80C of the Income Tax Act. Effectively, you can earn higher post tax returns because of the exemption. Ideally, always use these tax funds as your entry point into mutual funds. We all understand the need to save taxes and ELSS funds are one of the most productive and effective methods of saving on taxes. As well make the best of it!

Adopt SIP approach to investing

A systematic approach works for various reasons. Over longer period of time, it is almost impossible to predict market tops and bottoms. That means; timing the market is next to impossible. You need to just decide on a monthly allocation and maintain the discipline. Not only is timing the market not possible, it is also not worth the trouble. Rather if you consistently invest in a fund over a longer period of then your average cost comes down and your yields will go up substantially. That will really work in your favour.

Maintain an online portfolio

Make it a point to maintain an online portfolio of your mutual fund holdings. It is quite simple and you can open an online portfolio in any website. You can just log into the online portfolio and see the accumulated value of your SIPs at any point of time. Above all, it can also give you useful triggers on funds that are outperforming and the funds that are not living up to your expectations.