Many retail investors in India prefer investing in mutual funds over other instruments mainly because of their high return potential. While it may seem a lucrative prospective to jump onto the mutual fund investment bandwagon right away, if you are a first-time investor, gathering as much information as possible about mutual funds before you start investing is advisable.
In this write-up, we discuss four vital things you must know.
There are different types of mutual funds, like equity funds, debt funds, hybrid funds, ELSS funds, and more. Every fund category has a different level of risk, which makes them ideal for investors with a specific risk appetite.
For instance, equity funds invest your money in equity instruments and come with the highest level of risk.
Moreover, equity funds are subdivided into small-cap, mid-cap, and large-cap funds. The risk profile varies even within these subdivisions. You must consider investing if the risk level of the scheme matches your risk appetite.
One of the most significant benefits of mutual funds is the availability of schemes spread across asset categories. For instance, equity funds are highly recommended for long-term wealth creation and investment tenure of 3-5 years and above.
While you should always focus on diversification, the mutual fund portfolio should be more inclined towards funds that suit your objective.
As a first-time investor, you may feel confused and have questions about investing in a lump sum or starting a SIP (Systematic Investment Plan). You can invest a lump sum if you have surplus cash and want to invest for a more extended period of five years or more.
This will give your investment ample cushion against short-term market movements. Also, investing in a lump sum may require some experience and expertise in choosing suitable funds to get valuable returns.
As a first-time investor, it is better to go the SIP way. This will help you invest a small amount periodically, and you can be more disciplined with your investment. You can make an informed investment decision using an online SIP mutual fund calculator. This tool can help you know the approximate returns on your investment over a specific tenure.
While factors like risk appetite, objective, and investment horizon can help choose the fund category, selecting the suitable scheme within a mutual fund category can be challenging. So, what do you do? You can analyse the past performance of the scheme over a period to make a decision.
Many experts recommend choosing a scheme that has delivered consistent returns over three to four years. While the past performance is no indication of future returns potential, generally, schemes that have performed consistently tend to offer better returns in the long run.
Additional Points to Consider Before Investing in Mutual Funds
Ready to Invest in Mutual Funds?
An extensive range of fund options, professional management, easy online access, and high liquidity are some of the reasons why mutual have become a preferred investment choice. But it can be challenging to achieve your investment objective if you don’t clearly understand how mutual funds work.
Make a note of the points discussed in this post and achieve your financial objectives.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS,
READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.