We are never too young to start investing. Being smart and prudent about one’s finance help to instill a sense of responsibilities and stability, it is true that we can earn interest on money in saved up in banks, but the interest on that is capped at just about 2%. One of the investment alternatives for a beginner is mutual funds with higher interest amounts as opposed to just deposits.
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Contents
What is a Mutual Fund?
A mutual fund is an instrument used to collect funds from investors to be invested in securities portfolio by an investment manager. Mutual funds are ideal for anyone who has limited time and information but would still rather invest in the financial market.
Asset Management Companies help to invest its customer’s funds into stocks, bonds, and securities. Fund managers who are familiar with the financial market provide investors with the knowledge about investing in these mutual funds.
Why Mutual Funds?
- Diversification to reduce risks is quite convenient to do when dealing with mutual funds.
- Since a professional fund manager manages the fund, it does not require the time of the investor.
- The gains that are acquired by investing in mutual funds is not subject to tax.
- The investors have the added benefits of liquidity- their equity can be redeemed at any time as long as it is in adherence to the regulations set by the market.
Short Term Mutual Fund Investments:
Short term mutual funds are those that offer a maturity for a minimum period of 15 days to 91 days. It is best suited for beginners who are looking to invest with low risk involved.
Short term mutual funds offer higher returns than those tendered against bank deposits. Depending on the assets in the fund portfolio, the returns could range from 8-9%
Novices and beginners should always enlist the help of professionals before they invest in mutual funds.
Returns from Mutual Funds:
Capital appreciation and Dividends are the two returns from mutual funds. Under the dividend and distribution plans, the returns are tax-free. There is no burden with respect to taxes when it comes to equity mutual funds.
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Investments for Beginners:
1.HDFC Savings Fund This particular saving fund invests in floating rate securities uses money market instruments to maintain a low-risk high return portfolio. This is one of the Best HDFC Mutual Funds for a minimum investment of Rs 1000 and an expense ratio of 0.25%.
2.ICICI Prudential Short Term – Growth Option This short-term debt fund has a high expense ratio of 1.21% and a comparatively higher Net Asset Value as well, currently at Rs. 35.96. It offers stockholders’ investment opportunities with a minimum of Rs. 1000 and a similar amount to augment it.
3.Aditya Birla Sun Life Corporate Bond Fund – Discipline Advantage Plan The investment objective of the scheme is to generate optimal returns with high liquidity through active management of the portfolio by investing in money market instruments.Its Net Asset value is Rs. 65.979. The expense ratio is 0.33% and needs a minimum amount of Rs. 1000.
4.Axis Liquid Fund It is one of the most popular liquid fund options in the market currently. It has a low risk and a high degree of liquidity. With a minimum investment amount of Rs. 1000 and an expense ratio of 0.10%, it is a great investment option for beginners.An average return of 8.19% has been recorded ever since its launch.
5.Principal Cash Management Fund The principal cash management fund utilizes and invests in money market and debt instruments to provide investors with a high level of income and maintain liquidity.With a systematic withdrawal plan of Rs. 500, and an expense ratio of 0.14%, the fund has consistently outperformed the benchmark liquidity ratio.
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Tips to Invest in Mutual Funds:
- Keep it Simple
Keep investments simple. Do not complicate investment strategies. A couple of low-cost index funds should suffice for beginners who are still learning to handle the ropes.
- Consider Expense Ratios
Mutual funds do not have a monthly bill that needs to be paid by the investors. They are low maintenance, and the fees are subtracted from the assets in the funds. Investing in low-cost mutual funds is the solution to it.
This, been said, takes money to run a mutual fund. Salaries need to be paid, there are portfolio management costs and other miscellaneous expenses. An investor should want to own funds with the lowest expense ratios. Short term mutual funds are recognized for this.
- Mutual Fund Research
Investors have a myriad of choices to pick from and are often left perplexed. Learning how to choose the best funds will reflect positively on the performance of your portfolio. Investing with a plan helps stockholders stay the course and avoid aberrations.
Performances of the funds can be compared to get an idea of which direction to head in. Crucial qualities of mutual funds like the manager tenure, expenses, and fund fees need to be deliberate.
Financial literacy is vital to understand the affiliation between liabilities, assets, income, and expenses. Work smart instead of working hard.
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- Consistency is key
When it comes to investing in mutual funds, inconsistency should be steered clear of. Stocks and their performance in the markets over the past couple of years need to study and analyzed before any decisions regarding it can be made.
Avoid “performance chasing.” Never make decisions based on a stock’s most recent performance in the market. This can have a false allure and will result in deviation from the investment plan. Have attainable, time-specific and smart goals when it comes to investing in mutual funds.
- Introduce diversity in your portfolio
Especially for novices in the field of investments, diversification is a key strategy.
The different kinds of funds available for investing include large, mid and small cap funds, index funds, diversified equity funds, sectoral funds and commodity-related funds to name a few. Balanced funds, for instance, are preferred by investors to mitigate the effects of an equity-based portfolio.
Funds can be chosen based on the asset allocation they require. This helps to diversify your investments and reduce risks as each of the funds come with their own set of pros and cons. Factors like the volatility of the market, inflation and fluctuating interest rates can all have adverse effects on mutual funds.
Discipline yourself to build long-term wealth. Asset allocation in different funds also establishes whether your portfolio is aggressive, moderate or conservative.
Img source: investorguide.eu- Impatience is a Poor Substitute for a Sound Plan
Fluctuating market conditions are not uncommon when it comes to dealing with the stock market. Stocks that produce long-term results will typically show alarming variability. A degree of level-headedness is a prerequisite while dealing with funds. Delay gratification to reap enhanced benefits from your long-term investments. Investing should be goal-driven.
- Be Aware of Risk Tolerance
When you invest in stocks, funds or bonds, you are leveraging your money. Risk tolerance is determined by the market volatility that you can handle. This should not put pressure on you, and high-risk investments should be avoided at all costs to maintain a consistent level of gains from the mutual funds.
- Oversee your portfolio diligently
Tracking results of the portfolio is critical to the overall performance of the said portfolio. As the price of the investment fluctuates, necessary rebalance needs to be introduced.
Mutual funds are preferred by investors for the flexibility in involvement that they allow. The fund manager keeps track of the mutual funds and regularly supervises the market. As a result of this, the investor tends to neglect to review the performance of the portfolio. This is a rookie mistake. It is critical to periodically assess the existing funds.
Pro investors leverage strengths, outsource weaknesses and are meticulous with their portfolios. Online tools can also aid in the process of portfolio tracking.
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Risks of Investing in Mutual Funds:
“Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” This disclaimer is quite widespread and accompanies any advertisement or announcement involving mutual funds.
Mutual funds invest money in different stocks and bonds. Different funds have their own set of risks. When the stock prices go down, the investment also goes down. By diversifying the fund across different stocks, the risks are minimized.
Government regulations can affect the returns and restrict the mutual fund performance.
Due to active trading in markets, they tend to have ups and downs, illogically. Liquidity risk is always present when dealing with mutual funds. If everyone wants to sell their mutual funds at the same time and there aren’t enough buyers, it puts the investors and their portfolios in jeopardy.
Ben Graham, the founding father of value investing used to say “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Mutual fund investments are the perfect prospects for beginners to start investing their money. With benefits like low risk and high return, it has proven to be an ideal investment option.
