There are different types of mutual funds available. As per one’s capability to take risks, mutual funds should be chosen. A sound financial health boosts prospects and adds to one’s risk-taking capacity. For beginners, mutual funds are preferred as a means to an end which is creating wealth. Investment professionals manage a collection of bonds and stocks which are called mutual funds. Here is the lowdown on what mutual funds comprise and you should pay attention to these details if you wish to invest in mutual funds.
First and foremost one should know the purpose for which the investment is being made. All your wishes and dreams should not be combined into one. You ought to know whether the investment is for buying a car or to provide for your child’s education or planning for your wedding or buying a home. One needs to have a clear figure in mind or an amount that one is intending to raise out of the fund and the period of time required to do so.
Key documents in hand
Keep all the requisite documents in hand. You should apply for KYC which are your personal details comprising your PAN Card, address proof, date of birth and your photograph. The form of the scheme that you are planning to apply for should also be duly filled. PAN Card is the basic document needed to invest in mutual funds. Aadhaar can help one to apply through e-KYC.
Mutual funds are a risky business. Higher the anticipation of return; more is the risk involved. One should be extremely careful when planning to invest. Equity mutual funds may fall but if you are not comfortable, there is no point investing in it, say experts.
Selection of the correct scheme and period of investment
While taking a decision of investment in mutual funds, one should seek the help of an advisor of mutual funds. He/she will guide you about the various mutual funds available according to your need and financial stability. Schemes like Debt, Liquid, Equity, Hybrid, options like Dividend payout, reinvestment or growth, and strategies like Lumpsum, SIP, STP, and SWP are available and can be taken as per the investor’s preferences.
Don’t go by past success
The success of a fund in the past doesn’t guarantee future success as well. IT and pharma, two of the most successful sectors in the past 5 to 10 years have not been doing well in the last year. However, they can be a good starting point to get interested and invest. Studying funds over many market cycles indicates how it has performed in various phases of the market — in low, high and volatile conditions. It is a good choice to decide on a fund if it has consistently shown a good performance.
Selecting the option
If you need huge funds over a period of time, growth option should ideally be chosen. But if you need gains in shorter spans of time, from one period to another, then dividend option should be picked. One can get profits when a company gains in the market with the dividend option.
Invest as per your age
When one is close to retirement, it means it is time to say goodbye to stock market as they expose your hard-earned capital. It is considered one of the thumb rules of the stock market. Experts say that investor should subtract their age from 110 and the result is the percentage of their savings that should be in the stock market combined with their individual risk-taking willingness.
It is always good to opt for a direct mutual fund where you need not pay commission to your bank or advisor as in a regular mutual fund. The amount of the commission is in fact added to your wealth and can be put to judicious use.