Are you looking to invest in mutual funds? You have come at the right place. This article aims to provide several investment tips and compare mutual funds to help an investor reach their financial goals.
Investment tips to invest in mutual funds
Following are some investment tips to invest in mutual funds:
- Understand the benefits of mutual funds
There are several benefits of investing in mutual funds. The primary one being the professional management it provides to investors. This allows new investors with little to no-knowledge about the workings of the markets to invest in mutual funds that require understanding the know-hows of the markets. Apart from that one enjoys other benefits such as power of compounding, rupee cost averaging, invest in mutual funds online from the comfort of home, diversification of investment portfolio, etc. No wonder, mutual fund investments are widely popular among retail investors.
- Types of mutual funds
As an investor, you must be aware about the different types of mutual funds available to you. Mutual funds are categorized on the basis of objective, asset classes, style, and strategy. Mainly, mutual funds are divided into four main categories – equity funds, debt funds, money market instruments, and cash and cash equivalents. Basis your investment goals, financial horizon, and risk profile, you can choose the appropriate mutual funds that help you reach your goals.
- Carefully analyse the risks associated with your mutual fund investments
No investment is entirely devoid of risk. There are different types of risks associated with different types of investments. Some common risks include market risks, liquidity risks, interest rate risks, country risks, credit risks, etc. Understanding these risks will help you choose an investment option that matches your return expectations and risk profile.
- Allocate assets carefully
When you allocate your assets in a judicious manner after careful planning, you are bound to maximise your returns on your investments while minimizing the risks. Experts advise investors to invest in a healthy mix of equities and equity-related securities, fixed-income instruments, and money market instruments. The proportion of allocation to each asset class would depend on your risk profile, investment goals, and financial horizon.
- Picking the right mutual funds
It is important to learn how to pick the right mutual fund investment from an array of options. With so many choices, it is easy to get carried away. One should avoid that and look for certain parameters such as age of mutual funds, total expense ratio (TER), quality of fund manager, performance record across various investment cycles, associated risks, asset under management (AUM), the underlying asset management company (AMC), etc.
- Do not forget to factor in taxation
Investors should not forget to factor in tax aspects and calculate expected returns post tax deduction to get a clearer picture of their investments. There are two types of taxes applicable on mutual funds –tax on capital gains and tax on dividends. Depending on the type of mutual fund you invest in, and the holding period of your investments, different tax rules are applied. Note that, dividends received on mutual funds in India aresubject to DDT or dividend distribution tax.
These are some of the important points that you as an investor must be aware about. Lastly, it’s a good idea to track your mutual fund investments on a periodic basis at regular intervals. This will help you distinguish the low-performing funds and help you switch to another fund if need arise. Happy investing!