Tips to Start Investing in Mutual Funds

When it comes to investing in mutual funds, there is still a lot of uncertainty out there among people arising a lot of questions like - 

   a)Which fund will be good for them?

      b) How long to stay invested?

      c) How to select a scheme?

      d) How long is actually long term?And so on...

Below I have written some pointers which people should keep in mind when they start their mutual fund investment journey.

Goal Setting:

Investors should clearly first list out their short, medium and long term goals for which they want to start investing. Also for how much time they can remain invested to realize these goals and how much risk they are willing to take to achieve these goals.

Once we have these 3 parameters identified, then we start researching for the funds which will match a particular investors profile.

Generally, for short term goals which are like 1-2 years apart, investors should stick to bank deposits, debt mutual funds (can give slightly better returns than bank fd).

Within debt funds, it is important to pick a scheme which matches your investment timeframe as there are different categories of funds for different timeframes.

Like if you want to invest for a few days or weeks, you should go for liquid funds.

If you want to invest for a few months to a year, then you should go for ultra-short term funds and so on.

For long term goals, we should go for equities as there is risk and volatility involved and sticking in it for the long term will eventually lead us to accomplish our goals as in the long term it has the capability to offer superior returns than other assets.

Since equity funds has its own set of risks, I would suggest if you are first time investor or a conservative investor, then balanced funds or large-cap funds are recommended.

How long is long term investing? I would say that investors should stay invested for at least 5 years when they are investing in equity schemes and at least 7 years if you are investing in small cap or mid-cap schemes as they carry more risks.

Ignore the AUM Size:

I have seen many people saying that this particular fund’s AUM size has reached so-so crores which is too much and the fund manager won’t be able to allocate the assets properly so we should not consider these funds.

But actually this is a completely wrong notion, as the fund has reached that level of AUM because of investor’s confidence and the fund’s continued performance across market cycles. So, while selecting a fund, investors should not look at the fund size rather look at the performance of the fund.

Consistent Performance:

Different people selects funds in different ways. Some will look at the ratings of the fund and invest or some will look at the 1,3 and 5 year performance returns and invest.

But this is not the right way to select a fund as these are short term performances which guide the ratings and the returns. Instead investors should look at long term performance of the funds as well as the consistency of the fund after all it’s your hard earned money and you don’t want to invest in a wrong fund and see it depreciate.

So, you should always look for consistent funds which has performed across the bull as well as the bear phases as well as look at the ratios pertaining to a fund like standard deviation, beta, etc.

Periodic Review:

You should always review your mutual fund portfolio. I think reviewing every 6 months is a good start. While reviewing, you should compare your fund’s performance with the benchmark as well as the category average of that fund. If it has fared well in both these categories, then you continue to stay invested but if it’s under performing don’t just sell your units and close the fund. First, looks for the reason of under performance as well as give some more time for the fund to perform if you think there is a chance of recovery. If not, then only you should think about selling the units and moving to a different fund. 

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