What Should You do Before Investing in Mutual Funds

When it comes to money, most get cautious and try not to put a foot wrong so that they won't have to go through torrid times. And particularly when things veer around mutual funds, you should possess one characteristic, i.e. attention to detail. Because any negligence on this can make you pay big time.

Yes, mutual funds investment reaps a lot of benefits for the investors by diversifying their portfolio. But there can always be slippages on the way. I mean, there are fund houses or schemes that perform exceedingly well for a brief period. Buoyed by such performances, you may tilt towards picking one of them. And if they do not have strong fundamentals like goodwill and sustained performance, it is most likely that you could end up burning your fingers as the time passes by.

So, by the looks of it, you need to be proactive and stay glued to every single information pertaining to fund house and its schemes before investing in them. We can act as a guide and prepare a deck for you to enjoy a sound mutual fund journey. Here are the pointers you should keep in mind before pumping your hard-earned money into mutual funds.

Be Clear of Your Risk Appetite:

Simply going by the return and not having an idea of your risk profile can prove to be a big dampener for you. Let's understand it through an example. For instance- Somesh, a 32-year old engineer, is someone very less risk-savvy and wanted to invest in an instrument wherein he can enjoy a stable flow of income. But one of his friends insisted him to buy an equity scheme that had offered return in the double digit. He got lured by the return and invested there.

The fund performed well for a year. But after that, everything went awry and he kept on losing the wealth. If I were in his position, I would have first got an idea of my risk-taking ability before subscribing to any mutual fund scheme.  

Investors are broadly classified into four types according to their risk profiles-

Conservative- These investors have a low-risk appetite and thus debt funds, money market instruments and fixed maturity plans (FMPs) will suit them the most. Investment in these schemes ensures a consistent flow of income.

Moderate- If you are an investor with your risk ratio being moderate, you would most probably want the capital to grow with the time. And at the same time, you would think of ensuring the safety of your money. Looking at these behavioural traits, a combination of balanced and debt fund is just what the doctor can order for you. A balanced fund invests in both equity and debt assets to offset the ill effects of each other.

Moderately Aggressive- Investors falling in this category invariably expect the growth of their capital. They take calculated risk and can bear volatility in the short-term. But the long-term prospects of an investment type must be good. This is exactly what they feel about investing.

Aggressive- With risk-taking ability on a high, aggressive investors only look at the long-term returns and do not lose hair on the fluctuations that may come in the way. No prizes for guessing, it's equity mutual funds that can go in sync with their attributes.

Clarity on Goals:

It's the goals that matter in life. Just as football or hockey strikers drain day-in, day-out to make sure they seamlessly score a goal on the playground, similarly you have to come with a proper plan to meet your financial goals. Well, these goals can be anything from swimming over the Brazillian water to letting your child study at a prestigious university. Your planning should be based on your goals and not get dictated by other means.

If you require about ₹ 30 lakhs 20 years down the line to for the marriage of your son, an investment of ₹ 5,000 per month via Systematic Investment Plan (SIP) can help you achieve towards your goal. In that case, you can do away with the requirement of the lump sum investment.

Glance at Long-Term Performance of the Scheme:

It's easy to get fascinated by the massive returns posted by a mutual funds scheme in India. But not often investors do a reality check on the same. And when things reverse, suddenly they get nervy and curse on their decision to invest. If you want to avoid such situations, then don't look at the short-term performance as it does not show the true picture. A long-term performance would say a lot about the scheme and thus enable you to choose a right fund in accordance with your risk profile and goals.

So folks, keep doing due diligence before taking a plunge with a mutual fund scheme.