while its great that you have made up your mind that you want to invest in mutual funds, you are also slightly cautious about making investment mistakes that might rob of your hard-earned money. Here is a quick guide to invest in mutual fund like pro:
Think beyond the schemes
- Do not start with a scheme or category in mind.
- First, list all your financial goals.
- Next, find out how much time you have to meet each of these goals.
- Finally, how much risk can you take to achieve those goals
- stick to safe avenues like bank deposits and debt mutual funds to take care of your short-term goals.
- Equity is ideal to meet long-term goals, as it has the potential to offer superior returns than other assets over a long period.
For debt schemes,
it is extremely important to pick up a scheme that matches your investment horizon. For example, you should park money in liquid funds if you are investing for a few days or weeks. You should pick an ultra short-term scheme to invest for a couple of years.
For equity schemes
Even equity schemes come with varying degrees of risk. Equity-oriented hybrid schemes or balanced schemes are ideal for first-time investors and conservative equity investors. Largecap schemes are recommended to conservative equity investors. Multicap schemes are meant for investors with moderate risk profile
PRO TIP: you should invest in equity only if you have a long investment horizon. As a rule, avoid equity schemes if you are investing for less than five years. You should have a longer horizon of seven to 10 years if you are investing in midcap schemes or smallcap schemes.
Focus on consistency
ignore short-term performance. Always look at long-term performance. You should place a lot of emphasis on consistency. You should always choose a scheme that has performed consistently during different market cycles over a long period. If you are familiar with key parameters like Sharpe ratio, standard deviation, sortino, etc, you may use them to compare your shortlisted schemes.
Always review your portfolio
- You should always keep a track of your investments.
- Make it a point to review your portfolio at least once every year.
- The performance of the scheme alone will not tell you anything.
- You should always compare the performance of the scheme with its benchmark and category to find out how it has fared in a particular period.
If the scheme has beaten both the benchmark and category average, you may continue with the scheme.
If it is underperforming for a year or more, you should put it on the watch list. Try to find out the reasons for its underperformance.
If you find the reasons compelling, you may give it a little more time. Otherwise, sell the scheme and invest proceedings in a better scheme in the same category.
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