Things to keep in mind before investing in Mutual Funds
A Mutual fund can be defined as an investment product that draws money from like- minded individuals with the objective of buying different financial securities like gold, stocks, and bonds, among others. Here are a few guidelines which can make you a very confident investor in the long run
A common error while investing in mutual funds that most people commit is to invest basis emotions. Investing in mutual funds based on good stock market returns, and pulling out money when the portfolios are negative in the hopes of restarting again, when the mutual fund markets become better is a rookie mistake.
The simplification of the concept of Mutual Funds investments is a prerequisite before listing out the right way to invest in Mutual Funds.
A Mutual fund can be defined as an investment product that draws money from like- minded individuals with the objective of buying different financial securities like gold, stocks, and bonds, among others.
Here are a few guidelines which can make you a very confident investor in the long run
Develop a structured approach
- Goal Identification
The first step is goal clarification. Think about how a student makes it a goal to achieve 90% marks in school or aims at getting into a top rated B-school. Similarly, decide what goals you want to achieve through the investment. Long term goals are best fulfilled by equity Mutual Funds due to their capital appreciation aspect over the long term while short term goals should be kept in low risk instruments such as bonds or debt mutual funds.
- Risk Analysis
Secondly, you should identify and decide what level of risk you are willing to take. Usually, higher risk entails higher returns, moderate risk promises moderate returns, and low risk churns out paltry returns.
- Go for Asset Allocation
The term ‘Asset allocation’ refers to the process of investing across different asset classes, e.g. equity, debt, gold etc in the bid to diversify the investment portfolio, roll back risk appetite and meet multiple financial goals. The reason is logical. Every asset class will not always give you the highest return. Different market cycles will come with better returns in different asset classes.
Effectively, the art of building an asset allocated portfolio has shown better returns over the years than always trying to guess the next bet asset and buying it at a high.
Dynamic Asset Allocation
This is a step that can turn your portfolio from ordinary to extraordinary. Dynamic Asset Allocation refers to switching capital between the asset classes as per the market conditions. It helps in keeping sufficient liquidity for market corrections to deploy to equity. This way you are buying at lows and selling at highs.
Having a Financial Advisor helps
Consult a Financial Advisory Firm to choose the correct investment portfolio.
Requiring to redesign your house requires the services of a contractor. A heart ailment can be best resolved by a Cardiologist. Similarly, a Financial Advisor can best identify pain points and design your Financial portfolio as per your Financial Goals and Risk Appetite.
Taking help from a Financial planner will have a cost associated, but Financial Planners have been able to offset the cost with the returns generated over the long term.
(Authored by Ms. Shalini Gera, Senior Partner, Ingenetus)
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