Tips for Beginners New to Mutual Funds
If you are just about starting out on mutual funds, what should you do? Obviously, there are no off-the-shelf answers. But some key pointers can be of use to you. Let us look at four such pointers.
If you are just about starting out on mutual funds, what should you do? Obviously, there are no off-the-shelf answers. But some key pointers can be of use to you. Let us look at four such pointers.
1. Start with your goal in mind
The most important thing in mutual fund investing is to start with your goal in mind. Unless you know where you want to reach and what you want to achieve, it does not matter how fast you run. That is the key. Once your goal is identified, for example; retirement, childâs education, childâs wedding, foreign vacation etc, and then you need to plan for it. A goal becomes a financial goal when you impute a monetary value to it. For that, you need to start with the current cost of the goal and then inflation it to a future date. Once you arrive at that goal, then you need to evaluate how much risk you can take. For long-term goals, you can take more risk and hence equity funds would be a good choice. For medium-term goals there is a limit to the risk that you can take and so you should opt for investments like debt funds and balanced funds. For very short-term goals, liquid or liquid plus funds are the best choice. That is why you must always start with your goal in mind.
2. Adopt a systematic approach to mutual fund investment
What do we understand by a systematic approach to mutual fund investing? Yes, we are referring to SIP investing. When you allocate a fixed sum of investment each month then you will get the benefit of rupee cost averaging (RCA). This works in your favour by reducing your cost of holding and enhancing your returns. But that is just one side of the entire story. Let us understand why systematic investing in really important when you investing in mutual funds. When you arrive at your goals and give a monetary value to it, the best way to achieve this goal is to attach a SIP to it. Each SIP must be clearly tagged to a future goal. That will not only help you to monitor and rebalance the SIP if required but will also help you to maintain discipline in achieving your goals. SIPs are also synchronized with your regular income flows and hence you will not feel the pressure of allocating money.
3. Make an entry into mutual funds via the ELSS route
A lot of investors are still quite skeptical about equities as an asset class as they believe that it carries risk. While it is true that equities carry risk, this risk gets evened out over a longer time frame. In fact, the biggest risk that you run is not taking any risk. That way you are sure to underperform and you will fail to create value out of your money. Therefore equity funds are very important for your long-term goals. But, how do you start? One good way of starting out on your equity fund investment is to adopt the ELSS route.
ELSS is a tax saving fund which invests in equities. You anyway need to save your income tax, so instead of buying PPF, you can buy an ELSS. You will hit two birds with one stone. You will get the exemption of Rs.1.50 lakhs under Section 80C of the Income Tax Act and also create wealth because you are locked in for 3 years. Since ELSS is locked for 3 years, the investors will not succumb to the temptation of booking profits in a short period of time. This ELSS enhances your returns due to the tax benefit and also gives you 3 years time to experience the benefits of equity investing. Of course, you should ideally adopt the SIP route to investing in ELSS funds too.
4. Stick to the tried and tested names
We are not just talking about pedigree in this business. Of course, that matters a good deal. But focus on funds that have substantial AUMs, who have stable fund management teams and have delivered steady returns over the last 3-5 years. We are not just talking about absolute returns but we are talking about risk-adjusted returns. Good funds are great optimizers. They either try to maximize returns for a given level of risk or they try to minimize the risk for a given level of return. Tried and tested names have delivered results over time and have a reputation to protect. You will not find them compromising on this brand so easily. That should suit you too as you are setting out!
