The
equity markets have been on the rise. New Fund Offers are again the
rage. And once again, you feeling tempted to invest in mutual funds so
that you don't miss the boat. At times like this it is important to keep
the following tips in mind, so that you do the right thing with your
money.
- Invest in Funds backed by experienced Asset Management Companies and Asset Managers
- Cheapest is not the best
- Don't invest in a new fund if a previous one of the same category exists
- Understand your risk appetite
- Build a strong foundation
- Be realistic about returns
- Give your money the chance to compound
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.
Source: http://www.itrust.in
Compiled by Amresh Anjan
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