Tips to invest wisely in Mutual Funds

“It is not your salary that makes you rich, but your spending habits!”

Mutual Funds are one of the best ways to invest, especially for people who are not from the insides of the financial world. Mutual Funds have given excellent returns over the long term to millions of people – provided these people invested in the right type of mutual fund. Selecting the right mutual fund is extremely important for long term success.

Here are some of the best time proven ways to invest smarter in mutual funds:

Start Early

One of the basic rules of being a successful investor is to start early. Since all investment and returns are based on the power of compounding (which means you earn interest even on the interest accumulated), an investor starting out early can earn much higher returns than a one starting out late even with a slightly higher corpus. Since a systematic investment plan does not seek a large amount of investment and users can start investing with a low sum each month depending on their financial condition, it allows them to start investing much early in life.

Warren Buffett started investing at age of 11, but he still thinks he was too late!

Invest regularly

Once you have selected a couple of good mutual funds and divided part of your money with a few fund types, make sure you invest regularly. It is great to get a SIP (Systematic Investment Plan) in place. This will ensure a part of your monthly earnings, automatically get invested.

A lot of people need this to ensure a sense of discipline and make sure regular savings and investments do happen. If you don’t have this, there are chances that you may end up spending money on things you don’t really need.

One of the major advantages of SIP is Rupee Cost Averaging, also commonly known as RCA. Investors investing a fixed amount of money every month towards any investment vehicle allow them to purchase more units or stocks when the price of the investment is lower. This reduces the average cost of purchasing of the financial asset over time, allowing maximum gains in the long term.

Illustration of Rupee cost averaging:

Investment Amount

NAV

No. of Units

5000 20 250
5000 10 500
5000 13 385
5000 20 250
5000 25 200
25,000   1,585

In the above example, investor has accumulated 1,585 units by investing INR 25,000, leading to an average cost of INR 15.77 per unit, whereas the latest NAV is INR 25 per unit.

Invest in funds with a good track record

It is your hard earned money and you have to take some efforts to ascertain if you are investing in the right scheme. Go with a fund house you trust. Fund houses should have investment processes in place rather than just some star names to manage money.

Markets can go up and down, but if there is trust, you can sleep peacefully at night, knowing that the people at your mutual fund are working in your best interest.

Though investment processes are important, fund managers do count. Keep a track of their performance. If the fund manager managing your money quits his job, put your fund on watch at least for some quarters. Generally fund houses with sound processes ensure that such transitions are smooth.

Do check if the scheme in which you want to invest has been a consistent performer. The scheme may have some short periods of under-performance, but in the long term especially in three, five, ten years’ time frame, it must do well as compared to the scheme’s benchmark as well as scheme’s category.

Select your scheme based on your ‘goals and risk appetite’

One of the most important points is to select your scheme based on your goals and the time horizon you have set for it. Investors should also take into consideration their Risk Appetite – whether conservative, moderate or aggressive. There are various types of funds available like liquid funds, debt funds, hybrid funds, equity funds etc. for everyone’s need.

Never sell in a panic

Once you have a systematic investment plan in place, stop paying too much attention to the ups and downs of the market. Simply focus on following your plan. This way you will not suddenly sell because you feel the stock market is falling. Instead, every time the stock market falls – continue investing as per your plan. This way you get lower prices.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ~ Warren Buffett

Make sure you continue investing in knowledge, as it is the best investment you will ever make!

Happy investing!

(Picture created by Shilka Edakkara)