The first thing here is to understand what kind of portfolio you need. Your funds will need to be divided into different asset classes to achieve the returns that you want. This is known as asset allocation. The ideal asset allocation route would help you to invest in a number of funds that are based on your risk profile. Your risk profile will also help determine the extent to which you should invest in each asset segment such as equity and debt.
WHAT ARE MUTUAL FUNDS AND HOW TO INVEST IN THEM?
WHAT ARE MUTUAL FUNDS AND HOW TO INVEST IN THEM? Is Bound To Make An Impact If you aren’t comfortable with an asset class even though it’s aligned directly with your goals, you should drop that option.Comparing Funds,Once you have factored in the points given above, you should be able to shortlist funds based on them. Here are some tips for picking the right funds:When looking for a Mutual Fund, understand its past history. Look at how it has done during market upturns as well as crashes
Finally, ensure that your risk profile is right. This may seem daunting but once you have charted out your future requirements and the time frame, you can find out what kind of risk profile you are comfortable with. Are you comfortable with the dynamics of the stock market and can you accept both ups and downs? Or are you looking for safe and assured bets that will meet your needs and still keep you safe? These depend on your personal outlook.
Importance Of Diversification
Every investment you make has some element of risk, regardless of the risk profile associated with the Mutual Fund. With diversification, you can minimise the potential losses, while earning profits, when you invest in a number of Mutual Funds. The best way to diversify your investments is by dividing your portfolio to include assets that are not fully correlated. You should have a healthy mix of equity, debt, money market, sector specific and other types of funds to have a balanced portfolio. Even within an asset class such as equity, you should ensure that the funds don’t invest in similar securities. This will help ensure that your portfolio is truly diversified.
The fund managers of Mutual Funds are usually highly experienced in their respective fields and will have years of experience handling different types of assets. And what’s more, you will be provided with the profile of your fund manager so that you know who’s actually handling your hard-earned money.
Your asset allocation should have a healthy mix of high-risk and low-risk components. The usual rule is that the percentage of funds you allocate to low-risk debt instruments should be equal to your age. For instance, if you are a 30-year-old, then 30% of your fund allocation should go toward debt instruments. This will cushion you against any downturns due to investments in high-risk assets. This might be true when you are young but as you grow older, you must reduce your high-risk investments. A golden rule here is that the younger you are, the more you can invest in equities and other high-risk Mutual Funds. Up to a certain age, your risk profile can be moderately high as you have certain flexibilities to invest in high-risk, high-return funds without getting too worried about potential losses.
There’s nothing more convenient than a central database providing you with all the required information and even highlighting what’s best for you. This is possible through Mutual Funds.
Your Fixed Deposit may be offering decent returns with little option for liquidity, or the stock market may give you decent returns with easy liquidity and a high probability of losses. A Mutual Fund is a fine balance between the two offering you good returns while providing you with decent liquidity.