When looking to invest, one must keep in mind the many tips, techniques and regulations which can help pick the right option to suit individual circumstances. Even with this knowledge it is often difficult to navigate the immense selection of choices that are available today. Day trading is an option for some, but even this requires a good amount of study and skill. In India, there are currently around 40 AMCs offering 1000+ mutual funds, a number which is progressively growing due to its increased popularity among investors.
Why Choose Mutual Funds?
Stocks are one of the most popular types of securities for investors. Many traders promise great financial rewards, but there is always a risk to be considered. If you’re attracted to stock trading but worry about taking too great a chance, then mutual funds may be the right option for you. Additionally, if you’ve already made some investments in stocks, diversifying your portfolio with a more moderate approach can be a wise move.
Investing in mutual funds is a good idea since the fund pools your money with the capital of other investors and then invests in a bundle of stocks. The fund is managed by a fund manager who selects funds based on any given investor’s needs. As a result, a mutual fund can be tailored to your needs, but you shouldn’t leave the choice to someone else. You can simplify your mutual fund choice if you follow some simple and straightforward rules.
The First Rule
The premise of investing is to be as beneficial for the investor as possible. People often look for quantity when it comes to investments, overlooking quality. This means that, instead of putting all their eggs in one basket by investing in a well-established IPO with positive historical growth, they may apply to multiple upcoming IPOs.
For those new to mutual funds, it is wise to invest only in one scheme in each of the major equity mutual fund categories. For example, a large-cap, multi-cap and two small or mid-cap plans could be a good option. This allows investors to diversify their portfolio by owning stocks from different segments, helping to reduce risks if one category does not perform well.
The Second Rule
Those who are not interested in mutual funds may find stock trading to be their ideal form of investment. Though it is a risk, even the most experienced traders have had losses in the exchange market. Therefore, understanding your temperament and risk appetite as an investor is important in order to make successful investments. Mutual funds can be a good option if you want to manage any risks involved.
The Third Rule
It is recommended you limit your mutual fund selections from any given category to two. Many schemes may look like attractive options, but it’s best to avoid going overboard with holding too many funds from the same type. Doing so would hamper the effectiveness of diversification and potentially result in poorer returns; essentially you’d be investing in the same stocks multiple times which makes for an unbalanced portfolio. Exercise caution when making choices and ensure your investments are balanced accordingly.
The Fourth Rule
If you plan to manage your own mutual fund investments, it’s best to stay away from sector funds. You may find it hard to determine when to enter and exit the market for profitable returns. It’s also likely that investing in a well-diversified equity portfolio will give you substantial exposure to a performing sector. Therefore, retail investors should limit their involvement with sector-related funds – if any – to no more than 5%.
The Fifth Rule
When it comes to investing, risk is always a factor to consider. Mutual fund investors typically add funds that are currently doing well, without researching the level of risk associated with them. However, this approach might not be advantageous if the markets take an unexpected turn. It’s best to pick funds that fit your own risk profile.
