The benefits of investing in mutual funds are limitless. The best advantage of investing in mutual funds is they allow investing as low as ₹500 per month.
So anyone can build up a corpus with a small amount every month. It can be a good substitute for chit funds as well.
However, there are some dos and don’ts that one should follow when investing in a mutual fund. So let me share them with you.
New retail investors are obsessed with the past performance of the mutual fund. So let me share some of the key Dos and Don’ts concerning the fund’s past performance.
Investing in a mutual fund is all about future performance, not past performance. So have a view about the future sectors and see if the fund is investing in the sectors you are bullish as well.
A mutual fund allows you to invest a small amount in the market to help you build a corpus for future goals.
So I always recommend investing in mutual funds via SIP. Yes, a knee jerk fall in the market can mean you can make some lump sum investment, but such opportunities are far and few in between.
If you want to build wealth in the market, you need to have a lot of patience. Patience on both fronts – First, to remain invested in the market and second, to hold the cash levels and deploy them at the right time.
It is effortless to place a purchase order or sale order in the market. However, real wealth can be built if you are patient enough to avoid it.
Peter Lynch has studied the market more than anyone else, and he has said that the market gives a correction of 10% or more every two years.
You will have ample time in the market to deploy your funds.
Be patient.
Then, you will see those corrections after you have deployed the funds.
So, Be patient.
We live in the era of social media, where every achievement is overly exaggerated. So you have to learn not to compare your portfolio’s performance with others.
Investors in India compare that if Warren Buffett had moved his investment from Coca-Cola to Pepsi, he would have made more money.
I don’t want to name them, but I know they aren’t an investor in them, aka Pepsi or coke. So anyone can tell from hindsight, but the critical point is at that time to invest such an amount and then remain invested in it.
Just remember, the longer you stay, the more you earn.
You shouldn’t compare returns, but there is one thing that you should constantly compare, and it is the expense ratio.
Once you have a goal for the investment, your focus shifts from returns to risk-adjusted returns.
For example, small-cap funds always perform better in a bull market, but large-cap funds give the stability that your portfolio may need.
So, once you know the CAGR return you want for the investment’s goal, you will focus on the risk more than the return.
Many investors cannot differentiate between a regular and direct plan for investing in a mutual fund.
Direct funds help reduce the expense ratio by almost 1%, generating much better returns for the investor. I recommend you check out my article How To Switch From Regular Funds To Direct Plan?
One fund in each category is suitable for diversification. Having three large-cap funds, four mid-cap funds, and two small-cap funds will not provide you with the needed diversification.
Index funds are much better than mutual funds in many ways. However, studies have shown that 80% of the funds cannot beat the indices in the very long run.
Equity mutual funds investments are subject to market risks. However, if your time horizon is less, your risk amplifies.
Invest in the market the money you won’t need soon.
Everyone is an expert when it comes to recommending mutual funds.
There are various MFs available like small-cap, mid-cap, large-cap, Flexicap and hybrid funds. You will need a certified financial planner to help you recommend them to you.
Learn from everybody but take your decision and own them. You will make wrong decisions, and everyone in the market does it. Learn from them and move on.
Finally, we all invest our hard-earned money for our loved ones. And we are investing for the long term.
Finally, always keep your KYC updated with current details.
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