The equity markets are on the rise. New fund offers are again the rage. And once again, you are receiving solicitations from your so-called financial advisors to invest in mutual funds so that you don’t miss the boat. At times like these it's important to keep some tips in mind.
1. Invest in Funds backed by experienced Asset Management Companies and Asset Managers: If you had the choice, you’d probably go to an experienced doctor rather than someone fresh out of medical school. Same with mutual funds. Invest through an experienced asset management company and a fund manager, both of whom have operating and investment history in India.
2. Cheapest is not the best: This is probably the most common and silly mistake that investors make when investing in mutual funds. For some reason they think that a Rs 10 net asset value (NAV) is better than a Rs 20 existing fund of the same category and type because the former is cheaper.
What matters is the amount of money you are putting in. Rs 1 lakh put into a either fund will grow the same amount assuming that both funds invested in the same underlying securities. So, whether Rs 10 grows to Rs 12, a 20% increase, or Rs 20 goes to Rs 24, it’s the same thing.
3. Don’t invest in a new fund if a previous one of the same category exists: At the time of a new fund’s launch, there is a lot of hype created through advertising aimed at enticing you to invest.
However, there might be a fund of this type already existing, which might be a better option because it has had an operating history for a while, as well as proven risk management experience in that category. You are better off avoiding the new fund at launch and investing in the older fund of the same category.
4. Understand your risk appetite: Not all medicines are suited to all patients. Some patients can handle a higher dosage depending upon their age, their allergies, their size etc.
Similarly, not all mutual funds are meant for everyone. Before you invest blindly, understand the risks involved and evaluate whether you can handle the risks associated with the fund and its underlying exposure.
5. Build a strong foundation: Just like a house needs a strong foundation, so does your mutual fund portfolio. You need to make sure you have a safe and stable exposure to index funds, large cap diversified funds before you start exposing yourself to sector and industry specific funds, which are usually of a higher risk.
6. Be realistic about returns: Trees don’t grow to the sky, and neither do stock market returns. Be realistic about what returns you can expect. Your money is unlikely to double in the next two years through mutual funds, and don’t fall for the salesmanship of your advisor.
7. Give your money the chance to compound: By chopping and changing your portfolio and getting in and out of funds frequently you are disturbing the process of compounding and not giving your money the ability to grow. Be patient, even if in the short term a fund might not be doing well.
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