Getting Started with Mutual Fund Investments

Mutual funds like any other investment avenue are subject to market risk. But those who are willing to undertake low to medium risk, mutual funds are preferable to them with returns of up to 23% or even more over a 3 to 5 year period.

Where do Mutual Funds Invest?

Broadly, Mutual Fund's investments are made into three types of asset classes:

Stocks: Stocks represent ownership or equity in a company, which are also termed as shares.

Bonds:  Investment made in debt from companies, financial institutions or government agencies

Money Market Instruments: These constitute short-term debt instruments such as treasury bills, certificate of deposits and inter-ba06/01/2017nk call money.

Mutual Fund Investment Guide:

Invest through SIP: Investing through SIP every month is an ideal way of investment banking in mutual funds. Every small amount invested every month holds the potential of generating a substantial amount over a period of time. For example: investing in ₹ 5,000 per month through SIP in equity fund with an annualized returns of 12% can yield ₹ 25 lakhs in 15 years.

Invest based on risk appetite: High-risk appetite investors are concentrated towards investing in equity funds and moderate risk appetite investors would like to invest in hybrid funds(Equity+debt combination) and low-risk appetite investors would like to consider investing more in debt related funds. In short, an investment made in accordance with an individual's risk style would generate higher returns.

Invest in various categories of funds: Large cap, mid-cap, and small-cap funds perform in a different manner over a particular period in various market scenarios.  Hence, investing in different categories of such funds would help investors to gain maximum returns.

Invest in sectors that are likely to outperform: High-risk investors who are considering to take risks would like to invest in high-risk funds such as sector funds. Such investors can undertake sectors that have the probability to outperform in the near future and invest in such funds. For instance, investing in infrastructure funds or banking funds would be an ideal bet for a short-term to medium term of 3 to 5 years.  

Invest in funds dependent on one's financial goal: Lack of awareness amongst investors about mutual funds could lead to wrong investment in the funds or failure in holding the fund for the longer term is some of the mishaps which are encountered while making Mutual Fund Investment decisions. Investors shouldn't invest simply because a scheme would fetch them 100% returns in one year. There erupts the possibility in the erosion of the capital amount of an investor if the market crashes. Hence, an investor should stay focussed towards their financial goals.

For example Subodh wants to keep aside Rs. 30 lakhs for their child's college expenses in next 20 years. Hence, an investment of Rs. 4000 per month in a well-diversified mutual fund portfolio of 15 years will actually help in realizing their goal.  

Use STP for lump sum mutual fund investments: Investing the lump-sum amount in equity funds is the biggest mistake any investor can make. This may sound to be a good strategy taken towards market corrections. However, when markets are shooting up or when investors are unaware of the market's direction, an ideal way to invest a lump sum in mutual funds is to invest in short-term debt funds or do STP(Systematic Transfer Plan) to equity funds over a specified point of time.


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