Mutual funds are regarded as the best inflation-beating investment instruments capable of wealth creation in the long run. However, since the stock market is susceptible to volatility, investors must remain focused during such phases to achieve their financial objectives.
If you want to know how to invest in mutual fund plans, here are the top five rules you may want to consider before investing.
- Be realistic about the returns
Typically, many new investors look at the recent past performance of a fund to make an investment decision. And they expect the fund to continue to perform, without considering the scheme risks or their risk appetite. It is advisable not to chase high returns but weigh in the fund’s pros and cons before making a mutual fund investment.
- Do not lose sight of your investment goal
It is essential before you invest in mutual funds to determine your financial goals. For example, if your objective is to buy a property in the next ten years, you can invest in equity mutual funds as they are known to tend to perform well over the long run. If the objective is short-term, debt mutual funds can be ideal.
- Do not panic when markets are volatile
Over the last few years, the total number of SIP investors have risen sharply. At the same time, some new investors flee the scene when the market begins to fluctuate or underperform. They discontinue their SIPs and wait for the market to bounce back. But, the key in mutual funds investment is to be patient during the highs and ride out the lows to receive mutual fund benefits in the long run.
- Have a balanced portfolio
One may know what is a mutual fund and the different types of mutual funds, but it can still be challenging to pick the right scheme. For instance, when the equity markets began performing exceedingly well in 2016, many investors moved solely towards equity mutual funds. Investing all your eggs in one basket – in this case, only in equities, – can be risky. This is because, if the market experiences a downturn, equities generally are the first to be hit. It is essential to provide a debt cushion to the equity component in a portfolio.
- Avoid over-diversifying your portfolio
Quite often, new investors, in their enthusiasm, invest in a significant number of schemes. Too many schemes can ruin the growth of an investment. While it is okay to diversify, it is not recommended to over-diversify. Investing in a more significant number of schemes could mean overlapping portfolios. Ideally, one can invest in two to five mutual funds.
As a new investor, it can be overwhelming to analyse thousands of mutual funds schemes. You can seek the guidance and recommendations from a mutual funds expert to understand how to build the right portfolio and enjoy the benefits of mutual funds.