Mutual Funds – Essential Items to consider Ahead of Investing

Stock Market is a term which evokes a spectrum of emotions in numerous people. Some strongly feel it’s only gambling, many others feel it’s a certain fire way to lose money. Several get yourself a high on trading in stocks all day long long. Some put it to use wisely to increase their wealth. The fears associated with the stock market have come down significantly since early nineties and now a lot of people feel comfortable investing in the stock market. The content is specific for Indian investors though all the ideas expressed are universal.

Investing in the stock market requires careful study, constant review and quick decisions. Cherry picking a share and keeping yourselves กองทุนบัวหลวง updated about the organization and timing your buying and selling can occupy a major part of one’s time. This is where in fact the Mutual Fund industry can lend you their hand. A Mutual Fund is managed by way of a Fund Manager and a team of analysts who take their time to study the stock market and invest your money. It saves you from most of the hassles of stock market investing and you also have somebody to look after your money.

The Mutual Fund industry has come a long way since its introduction in India in early 90s. Mutual Funds provide a variety of options based on your risk profile to obtain high tax effective returns. Having said that, I’d caution readers that investing in mutual funds also needs a little effort from your side. Engaging in the wrong mutual fund at the wrong time can destroy your wealth. The risks associated with investing in any asset class [Stocks or Gold or commodities or bonds] are applicable to mutual funds also. For the more conservative investor, mutual funds offer contact with fixed income instruments through fixed maturity plan (FMP)/debt funds wherein your cash is committed to debt instruments. FMPs/Debt funds are more tax efficient than direct investment in FDs or bonds/debentures etc. I give below some points that should be taken into account while investing in mutual funds.

a. If you’re looking at investing money for the short term (1-3 years) and want the most effective tax efficient return then choose Debt funds/FMPs.

b. If you would like contact with stock markets then understand that stock market returns can be achieved only over the future as markets usually see- saws having an upward bias within the long term. So you might have to hang in there for over 5 years. Do not check your NAV(Net Asset Value) everyday and feel excited or melancholic as a result of erratic movement.

c. There are many than 30 fund houses (AMCs) offering more than 700 schemes. Pick the AMCs which were around for a long time (5-10 years will be a good metric). Do not diversify an excessive amount of and stay glued to good fund houses. The important points of fund houses are available in the web site of Association of Mutual Funds of India. You can even have the rating of each mutual fund on this website. Check to see if the AUM (Assets under management) is high; this ensures that the Mutual Fund has the flexibility to have a hit in case 1 or 2 companies that they’d committed to get into trouble.

d. Always remember that past performance is not helpful information for future performance. Select consistent performers.

e. Select New Fund Offer [NFO] only during a substantial downturn as this enables the fund to get involved with stocks at lower prices. For Debt funds choose for NFOs when interest rates start peaking. Do not get into an NFO because you are swayed by the smart ad in the media. Usually NFOs concentrate on the flavor of the summer season to tempt you [Commodities, Green Energy, Emerging markets etc].Some may play out; some will die an all-natural death. So exercise abundant caution.

f. The most effective time to start an SIP is when the market starts showing a downward trend and the worst time to panic and stop an SIP is once the stock market switches into deep decline. In reality here is the time when the true investors rub their hands in glee. So you must try and raise your SIP amount when the market is actually down and then once the market bounces back you are able to return to your regular amount. Fix a platform and set a target – e.g., for each and every 100 point fall in Nifty index increase SIP by Rs. 1000 and reduce exposure similarly as the market bounces back.

g. Do not expect extraordinary returns. On a long haul basis mutual funds give an annual return of 12-15%.

h. Perform a review one per year and check out of sectors that you’re feeling have peaked out.

i. It is advised to have an SIP within an index fund/exchange traded fund (ETF). An index fund invests in companies that form this index. For example if the index fund is based on the Bombay Stock Exchange (BSE) Sensex, then it invests its funds in the businesses that make up the index and the NAV tracks the BSE Sensex. This fund will always have a return that closely mirrors the return of the stock market. This is a very safe way and protects you from individual gyrations in stock price of an organization or sector. The stock exchange will promptly replace an organization from the index in case it starts underperforming and your fund does the same. So you are always assured of a return very near the market return.

j. Do not confuse an insurance product which invests in the stock market with a mutual fund. They’re two completely different products. Insurance products have high charges and give far lower returns when compared to a mutual fund.

Mutual funds are ideal for folks who do not have the full time or patience to take the effort required for successful stock picking. They offer the investor a wide choice of contact with different asset classes and sectors based on risk profile and if chosen wisely can offer extremely satisfying returns to increase wealth.

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