Do’s and Don’ts of Investing in Mutual Funds
Whether you are a novice investor or consider yourself an accomplished market-player, you should park some or a large part of your investments in mutual funds. Mutual funds are handled by fund managers, who are professional and who know how to time and invest in the markets and churn the stocks so that they minimize losses and maximize returns on investment for the unit holders. However, fund managers and therefore mutual funds are still subject to market ups and downs, so mutual funds can also underperform or outperform the markets.
You are putting in your money so it is up to you to put your research in place as to which kind of mutual fund is right for you. You cannot simply blindly invest in any fund, no matter what the brand name attached to it. Firstly you have to select from the wide range of mutual funds in India. These include open-ended, closed-ended, equity, debt, sectoral, diversified, index, mix-cap or small-cap, tax saver and many more. Then you have to decide the amount you want to invest and in how many funds – this can depend a great deal on your financial goals. Here are some do’s and don’ts of investing in mutual funds.
• Research various funds and instruments before putting your money down and see the average returns the funds have generated.
• Factor in all the money you have to put in including fees, brokerage and taxes.
• See the track record of the fund in the long-term (if it is a new fund, check out the track record of the company).
• Diversify and keep money in different funds.
• Use a systemic investment plan for mutual fund units.
• Regularly monitor your mutual fund investments.
• Put all your money in one or two funds.
• Be blind to market risk, specially in a volatile market.
• Focus only on short-term gains – often the extra expenses incurred will pare these gains considerably.
• Ignore risks completely – check the best three and worst three months returns of any particular fund to get an idea of the kind of the potential risk-reward situation.
• Try to time the market – if you buy high you may have to sell low or your returns won’t be as good.
• Buy and sell your units often.
It is crucial that you have investment plans for any spare money that you have, otherwise your money will simply depreciate due to inflation. If you invest at the right time and the right amount in the right funds, you can look forward to good returns on your investments.