What Is The General Rule When Investing In Mutual Funds?

The basic rule of investing in mutual funds is that it conscious decision and not a random decision.

17 Aug,2018 18:55 IST 25 Views

The most important rule that you need to remember about mutual funds is that ?Mutual funds must be bought by you and not sold to you?. This statement has a much larger significance but we will come to that later. First, let us understand this aspect of buying a mutual fund versus being sold a mutual fund.

When Mitesh Mehta got the fourth call for the day from the mutual fund salesperson, he almost invited the rep over out of frustration. His wife had been urging him to invest money in mutual funds for their future and the rep was also chasing him. That night, Mitesh wrote a cheque for a small lump-sum investment as well as for a regular SIP of Rs10,000 per month in an equity fund. Both the funds selected by the rep for Mitesh were from top quality fund houses with a track record of consistent performance. However, in the process, Mitesh had missed out on the basic rule of investing in mutual funds as a conscious decision rather than as a random decision. From this general rule emanate four important sub-rules that every mutual fund investor should keep in mind.

Before You Invest, Be Clear On What You Want To Achieve

That is how mutual fund investing should commence. What Mitesh did was to invest randomly just because his wife was urging him to invest and the salesperson was chasing him. Ideally, this decision should begin with a plan. What does he want to achieve in life? How much corpus does he require for his retirement? How much does he need to set aside for his child?s education? Does he need to plan for the home loan margin and if so within how many years. The most important thing is that your mutual fund investments must be determined backward. You start with goals in mind and then work backward. That means; your mutual fund investments should fit into your long-term financial plan and ideally, your SIPs must be clearly tagged to goals.

Your Risk Appetite Is Unique And So Should Be Your Investment Strategy

Remember, when you are buying mutual funds you are the subject and not the sales representative. So, ensure that the mutual funds you buy not only can take you towards your goal but also take care of your risk appetite. Your risk appetite is like your fingerprint; absolutely unique to you. So, do not accept any generic off-the-shelf solutions. For example, if you are 30 years old and you are keeping 80% of your money in debt funds then you have got your risk appetite definition all wrong. Similarly, when you are 45 and on the threshold of delivery on responsibilities, you cannot afford to take on too much risk. Let your mutual fund investments be customized to your risk appetite.

Know What Your Are Buying And Why Are You Buying

In the case of Mitesh; it is most likely that he never bothered to ask the sales representative some probing questions on the portfolio of the fund, the reason for outperformance, volatility of the fund, duration of the fund etc. When you are buying a mutual fund, you need to know the contents of what you are buying. Be it an equity fund, debt fund or a liquid fund; you must know the finer details of what you are buying in terms of composition, costs, risk etc. When you are selecting a particular fund also have a checklist on why you are not buying other funds.

You Need An Advisor, Not Just A Salesman

This is the fourth aspect of this rule. You will get a lot of sales pitches during the day for every product from mutual funds to credit cards to bank loans to bonds. You cannot be buying all of them. That is why it is always preferable to first sit down with your advisor and let the advisor drive your investing goals. Once the goals are clearly laid out, the rest will follow.

For a very long time, investments and insurance were sold and not bought. Investors literally bought whatever was sold to them by their trusted friends and family members. That approach could lead to a distortion of your financial matrix and compromise your long-term goals. Let every investment decision be calibrated and evaluated. Above all, let it fit into your grand financial plan.

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