How to Invest in a Mutual Fund for Beginners – 5 Tips for being a Successful Investor
It is the innate desire of many to live a financially independent life, and to accomplish this goal people invest in different investment tools like Mutual Funds. If you are new to Mutual Funds, this article will provide you with valuable tips to be a successful investor.
Over the past few years, Mutual Funds have emerged as the popular investment option for people who are looking to grow their savings and build a retirement corpus. One of the important reasons for its popularity is the flexibility it offers to the investors. You can start investing in Mutual Funds with as little as INR 500 per month, and you can stay invested for as long as you want. While Mutual Funds investment is an attractive proposition, a lot of beginners find it daunting because they lack basic knowledge about it.
Most amateur investors believe that all Mutual Funds are the same. However, this is not true. The Mutual Funds are divided into different categories like debt, equities and hybrid funds, and each of these types has sub-types. Due to the diversity that Mutual Funds offer, it can be difficult for beginners to choose the right fund. If you too are an amateur investor, the following tips on how to invest in Mutual Funds would greatly help you.
Know about the risks
Every Mutual Fund has a certain amount of risk involved based on the type of security you invest in, and the investment methodology followed. Know the rule of thumb that the equity funds, especially the small and mid-cap funds, have the highest risk factor, but they also have the highest reward potential. The debt funds, on the other hand, are relatively low-risk funds, and they offer lower returns. Depending on your risk-taking capacity, you can invest in either of the two funds.
Have a clear investment objective
Once you know the risks involved and the potential benefits of the different Mutual Funds, the next important question you must ask yourself is how long do you want to stay invested? And how much you can afford to invest without compromising on your regular expenses? The Mutual Funds are very flexible. You can start investing with as little as INR <500>. Besides, apart from certain Mutual Funds schemes like the Equity-Linked Savings Scheme (ELSS), you can invest and redeem your investment at any time you want. This gives you the liberty to choose the right type of scheme based on your financial goal. For example, if you want to stay invested for long-term and get tax benefits on your income, you can invest in ELSS. If you are looking for a short-term investment scheme with a low-risk profile and get higher returns than the savings account, investing in debt fund would be an ideal choice.
Diversify your investment
Many experts suggest that the best way to capitalise the benefits of Mutual Funds is to have a diversified investment portfolio. What this essentially means that you should not invest all your money in a single asset class, make sure that you invest a smaller sum in different instruments, so that you can balance the overall risk and get valuable returns.
Review the portfolio periodically
One of the biggest mistakes that newbie investors commit is that they ignore monitoring the performance of their investments. A periodic review gives you the chance to know exactly which type of funds are performing well and which funds didn't perform as per your expectations. Once you know about the performance, you can consider reallocation of the funds and invest more in the high-performing assets and maximise the earnings.
Mutual Funds by no means is a ‘get rich soon’ scheme; to be successful, you must have a good understanding of the market as well as a robust investment strategy.
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