Mutual funds can be a good option for long-term investments provided you stay with your investment. If you have no experience in the market and don’t want to expose yourself to the risk associated with the share market, then a mutual fund can be a great investment option for you.
What are mutual funds?
A mutual fund is a way in which a large number of people who are willing to contribute small amounts come together. The amount collected by all of them will be handed over to the Fund Manager to manage and generate returns for you. Through your single investment in mutual funds, you actually invest in multiple companies. That means a mutual fund is a group of investments packaged into a single investment.
Why a mutual fund is a good option for investment
Mutual funds can be a good option for long-term investments provided you stay with your investment. Here mutual fund houses pool the money from various investors and then invest in various investment tools like stocks, bonds and other assets.
Because every mutual fund house appoints a fund manager who is well-qualified and educated to handle all your investments and he will make investment decisions on your behalf. A Fund Manager is the person who makes decisions regarding buying and selling of shares on your behalf after thorough research. But before investing with them, there are certain things that you must know. By the time you have gone through this article, you will have an understanding of each.
Is it safe to invest in mutual funds?
Mutual funds are operated by big fund houses which are regularly scrutinized in terms of process and transparency by the agencies. Hence it is quite safe to invest with mutual funds provided you are ready to acknowledge the fact that mutual funds returns are subjected to market risks. Although mutual funds investments are subjected to market risks, it is closely watched for the protection of the interests of investors by the Security Exchange Board of India (SEBI).
How to Invest in Mutual Fund
Mutual fund investments are subjected to market risks and they will generate the expected results in the long-term investment only. So, if you have made up your mind to invest in mutual funds, then there are certain things that you must know before investing:
Stocks or Bonds
You must be aware that stocks/shares are examples of equity market investment where you own partial ownership with the company while Bonds are fixed-income instruments. You can go for any of these two investment options by investing in mutual funds. Risk avoider investors or old people can go for bonds while aggressive and young investors should invest in stocks. Anyhow every investor irrespective of age must have his portfolio diversified among all classes of investments. Investors should follow the basics of personal finance to manage their money efficiently.
Active or passive funds
There are two types of funds where you can invest through mutual fund investments; one is active funds while the other is passive funds. Active means an actively managed fund that is done through the appointment of a fund manager specifically for managing those funds. While passive mutual funds simply track an index in the share market such as Nifty 50 or Sensex.
An Active Mutual Fund tries to beat the index’s performance while a passive mutual fund tries to keep the performance equal to these indices. As passive funds are simply trailing the index of the market so sometimes also called Index Funds. It is not necessary that every active mutual fund generate more returns compared to the index of the market, so you must check the performance of the funds before investing.
Mutual Fund related costs:
Investing in mutual funds is not free and it comes with fees that an investor has to pay for his investment. There are many types of costs associated with a mutual fund but the main cost which is significant is the expense ratio. The expense ratio is the percentage of the total asset of the fund which goes as annual fees. If your mutual fund has a 2% expense ratio means a total of 2 Rs out of your 100 Rs investment will go to the fund house as annual fees.
Passive Mutual Funds have less expense ratio because these funds simply invest with the index benchmark of the market. But active mutual funds have a high expense ratio because here fund houses have to pay the fund manager as well for managing the fund efficiently. There are many other small costs associated with the investment in a mutual fund and you should know every bit of it because it is your money that will be feeding all the fees.
How much to invest
It is a very important question that you must ask yourself before investing in any of the market instruments. There is no specific answer to this question and it totally depends on your budget plus your financial goals. But one thing you must make sure that is proper diversification of the funds or investment across all the tools. You should invest in fixed-income instruments as well as stocks.
Thumb Rule to know How much to Invest and Where
One thumb rule you can follow for investment is to take your age and subtract it from 100 and allocate the percentage of funds according to the answer. For example, if your age is 30, then 70% of your investment should be invested in stocks and 30% in bonds or any other fixed-income instruments. Or you can say that investment equal to your age should be allocated to fixed-income instruments and the rest must be invested with stocks.
The second but most important thing is to keep investing regularly in mutual funds. Long-term investment will always be fruitful if you are a small but consistent investor. Compounding which is also called the Eighth wonder of the world will do wonders for you financially if you remain invested for the long term. You can start your investment through the SIP (Systematic Investment Plan) method with a minimum amount of 500 Rs only.
Account for investment
If you made up your mind to invest in a mutual fund then you must have an account for this. You have two options with you for account opening and one is to approach a broker directly in offline mode. While the second and most convenient method is to go online where many applications allow you to invest in mutual funds. These applications can run easily on mobiles as well, so you can manage your fund at your fingertips. Also, the process of opening of account online is very easy nowadays and it is just a matter of 3-5 minutes only.
You can go for a broker if you have no idea about how to select mutual funds for investment and a broker can be helpful in guiding you the same. However, if you have a little bit of knowledge then mobile applications will provide you with every data you need to select the best mutual fund for your investment.
Keep a track of your investment
Just starting an investment with a mutual fund is not enough, and you have to keep track of your investment at regular period of intervals. Tracking fund performance is important for you to fulfill your financial goals. If you found that any mutual fund is performing well as per your needs and expectation, you should consider it to change or switching out to another best one. But for this, you must have specific goals in your mind before starting an investment. Let’s say you want to save for short-term needs which will arise in near future, and then you should search for funds generating more returns in the small time frame of investment.
You may also like to Read:
- Why Systematic Investment Plan (SIP) in Mutual Funds are the Best for you?
- Best Investment Advices to learn from Warren Buffet
Mutual funds can be great tools for investing for the long term without having the tension of selecting individual stocks and bonds. By understanding the basic concepts discussed here in this article, you will be able to build a strong portfolio for yourself catering to all your financial needs.