Ten Key Mantras for Mutual Fund Investors

Ten Key Mantras for Mutual Fund Investors

Mutual fund investing is for everyone. Asset Management Companies (AMCs) offer multiple schemes with varying combinations of risk-return, investment horizon, exposure, asset classes and tax-treatment. The trick is to choose wisely.  Whether you are new to investing through mutual funds or a seasoned investor, following these ten key mantras will ensure that you make the most of your investments.

Ten Key Mantras for Mutual Fund Investors

1. Stay true to your risk appetite – Based on the investment objective, underlying securities and investment methodology, every mutual fund scheme carries different amount of risks. While equity funds have the highest risk, liquid funds carry the least.  Choose a scheme that suits your risk appetite.

2. Have clear goals and invest accordingly – Read the scheme related documents to learn about the objectives of a scheme, past performance and the time horizon. Ensure that you invest in a scheme that is likely to offer the best return, in time for your goals. Equity based mutual funds may be preferred for goals which are at least five years away.

3. Be disciplined – At the onset, make a financial plan and invest accordingly. In the long-term, small but regular investments have proven to generate better returns. Take the Systematic Investment plan (SI) route and start investing every month. This also allows you to benefit from Rupee-Cost Averaging. Gradually, as your invest-able surplus increases, start investing more.

4. Stay invested and do not try to time the market – Everybody knows that one should ‘buy at low levels and sell at a high’. However, nobody knows what these levels are. It is not possible to time your entry in the market. Hence, it is ideal to invest early (and regularly) and so that your money has enough time to grow through compounding. Also, avoid churning the portfolio unless necessary.

5. Diversify – Mutual funds offer you several opportunities to diversify your investments. Different investments,
include diversified equity (large-cap, mid-cap, small-cap), sectoral funds, commodity-related funds, global fund of funds, index funds, etc. and the entire gamut of debt-based funds. There are ample baskets for all your eggs. Choose wisely.

6. Do not be lured by NAVs – Unlike stock prices, the absolute value of a mutual NAV does not suggest anything about the quality or performance of the scheme. A NAV is simply the function of the total asset under management and the no. of outstanding units. Hence, a scheme with a NAV of Rs. 100 is not necessarily better than a scheme with an NAV of Rs. 10. Consequently, investing during a New Fund Offer (NFO) does not mean that you are buying low.

7. Dividends are not bonuses – Mutual fund schemes offer dividend plans. Do not get lured to a scheme simply because it has declared a dividend. Once a scheme pays out a dividend, its NAV reduces accordingly. This means that dividends are paid from your own holdings. Unless it is imperative to receive dividends, invest in growth plans, which are ideal for long-term capital appreciation.

8. Include Balanced Funds and Index Funds – If you have a predominantly equity-based portfolio, consider balanced funds to lend some amount of cushioning. These are ideal for meeting challenges like inflation, interest rates, market volatility and for achieving diversification. At the same time, consider  index funds as cost-effective mutual funds that may help mitigate fund house and fund manager related risks.

9. Other Investment Vehicles – While investing through mutual funds is great, one must also consider other investment avenues like real estate, direct equity, government bonds and other fixed income assets.

10. Regular Monitoring – One of the most crucial aspects, that most investors ignore, is about monitoring their investments and examining its performance vis-a-vis their investment objectives. Periodic monitoring allows one to take corrective actions and stay on track.

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