Smartness is not inherited. It is built over time, slowly and steadily, just like wealth. And to grow your wealth, making the right decisions is of prime importance.
For making these decisions, we need to be informed, or we need to find someone who is well-informed and is willing to help. Like in the case of Mutual Funds..!
Mutual Funds can be hard to understand—for most of us, MFs were always that one line read really fast at the end of a television advertisement.
After immense googling, there came a simple answer, ‘Someone will invest your money for you. You accrue the gains or losses, they get their fee.’
That’s it. Easy-peasy. Or so it seemed.
Obviously, there’s more to it, especially if you want to be the smart investor that our title refers to. So let’s look at mutual funds first, broadly, so that we know what we are dealing with.
Basically, there are two kinds of Mutual Funds-- Debt or Equity
Now the question is, how do we choose?
Choose DEBT for a low-risk-low-return profile, when keeping the capital intact is more important than interest earning. If you have a short term plan to keep some money stashed away, Debt Mutual Fund is your way to go. Choose EQUITY for high-risk-high return profile, when your investment time period is of 5 years or more and your goal is to build meaningful wealth over a period of time. Give time to an Equity Mutual Fund, and it will grow.
You can also choose Balanced Funds, which is a good mix of Debt and Equity Mutual Funds. This is the advisable option for beginners.
Now let’s take it up a notch. We do have certain important pointers to pay heed to whilst investing in Mutual Funds. As easy as we may try to make them seem, Mutual Funds are subject to many risks, so we need to make wise decisions as we invest. Let’s look at a few things we need to keep in mind:
4 Keys to making a wise Mutual Fund Investment
Evaluate the Long-term Performance of a Mutual Fund
The actual performance of Mutual Funds is reflected in a longer time period. Any Mutual Fund that has performed better than its peers in a bear market is worth your money. As an investor, concentrate on funds that have been in the market for a long time—longer the time period, higher the resilience to market fluctuations.
Give sometime to the Fund manager, somewhere between 18 to 24 months, to exhibit the actual performance of the investment. Reviewing a fund too soon will only give incomplete information.
Research Capability of the Fund House Matters
Before making any decision, extensive in-depth research is required. Whilst looking at Mutual funds, you might not understand every single financial term, which is where well-equipped Mutual Fund advisors are sought after. Your money should go into the hands of Fund houses which have elaborate research capabilities. A new fund house with good backing or an existent well-known fund house is your best bet.
Consider the groups that have fared well in the past couple of decades on the Mutual Funds front. A demonstration of good research capability is important to succeed in generating returns.
Invest where your Fund Manager invests
Invest into a fund where your Fund Manager has put in his/her money. A voluntary wealth increment decision by your Fund Manager can be a good indicator of the fund’s performance. Follow the suit if you explicitly know it is not a mandatory part of his job, which can also be the case now-a-days. For example, Kotak Mutual Funds has made it mandatory for managers to invest in their own schemes.
Investment Strategy of the Fund House is Important
A clear well-defined strategy by your Fund house can be a great sign of their future health. Continuing with the same strategy reflects their success in implementing the same. Before investing, make sure that you match your risk readiness with their risk approach. Reliance Mutual Funds has an aggressive investment strategy—so if someone invests for the first time without research, he/she can be in for a surprise. Test the waters thoroughly before diving in.
One More Advice…
Monitor your investments: Once you have invested, you cannot sit back and relax. Keeping an eye on your investments is very important, so pay heed to market alerts and updates. Though, you should not get engrossed in the market, you will need to review the investments once in a while only.
With an overview of how Mutual Funds work and what can make you a smart investor, we hope you find the right investment to make. Also, one last thing, these investments will help you save tax as well!