Some advice for rookie investors…
New to investing, congratulations. Wondering why we are congratulating you? That’s because you have realized the importance of investing, something at which a lot of young earners turn their blind eye on. If there’s anything, we would like to tell you as a ‘know nothing’ investor is that it is necessary that you have a long term investment objective, especially if you are planning on investing in financial avenues like mutual funds. Proper financial planning is equally essential if you want to give your financial portfolio some diversification. A majority of mutual funds invest predominantly in equity and equity related instruments and tend to offer commendable returns for those who have the patience of holding on to their investments for a period of at least five years.
What are mutual funds?
Mutual fund investments are a decent option for young investors who are new to the world of investing. It is also ideal for those who wish to understand market trends and the vagaries of the stock market. Mutual fund houses collect a pool of funds from investors sharing a common investment objective. The mutual fund then invests on behalf of investors across various money market instruments like equity, debt, treasury bills, certificate of deposits, corporate bonds, etc. Because mutual funds carry such a diversified portfolio, they are considered to be less risky as compared to direct stock market / equity trading. Investors can choose some of the best performing mutual funds and track the performance of their fund at regular intervals to check whether the fund is giving them the desired results.
As a beginner, which mutual fund should I invest in?
Before you go ahead with any investment decision, it is recommended that you first have a defined goal. Having a defined goal is the first step in financial planning. Setting realistic goals always help as now you have a clear idea about how much or in which financial instruments you must invest in order to get closer to that goal potentially. The next thing in financial planning is to understand your risk appetite. Investors should never invest beyond their risk appetite because then there is a risk of losing all your liabilities.
In India, mutual funds are regulated as per norms defined by the Securities and Exchange Board of India (SEBI). Mutual funds are classified based on various attributes like risk profile, investment objective, investment strategy, benchmark, etc. Keeping these factors in mind, mutual funds are categorized mainly as equity mutual funds and debt mutual funds. Equity mutual funds are those mutual funds that invest predominantly invest in equity and equity related instruments of the total assets. Because these funds invest a large chunk of the fund in equity, they are considered to be of high risk. Debt mutual funds, on the other hand, invest in debt and debt related instruments like treasury bills, call money, government securities, corporate bonds, certificates of deposits, etc. These instruments come with a maturity period of up to 91
So coming to the main question, new investors should first identify whether they are willing to take some risk with the hope of earning some better rewards. If you do not mind taking some risk to give your portfolio an aggressive approach, you may consider investing in equity mutual funds. For those investors seeking tax redemption, you can even consider investing in equity linked saving scheme or ELSS. ELSS is an open ended mutual fund scheme with a tax benefit. An investor can invest up to Rs. 1.5 lakh per fiscal year in ELSS and bring down your gross taxable income.
However, if you are a conservative investor who doesn’t wish to expose their finances to volatile market conditions, you may consider investing in debt mutual funds. Because these funds invest in short maturity assets, debt investments are considered to be a lot less risky as compared to equity funds. Depending on your investment objective, you invest in ultra short / short duration fund, overnight fund, or if you wish to give your folio some liquidity, you can always invest in a liquid mutual fund.
So now that you been enlightened with some mutual fund investment tips, which is going to be your first ever mutual fund that you are considering investing in? Whatever you choose, make sure you stick to your plan and set long term goals.