Mutual Fund Sahi Hai – This is the best ever ad campaign run by the AMCs together. This has changed the mindset of the people investing in Mutual Funds in India. But all that glitters is not Gold. There is a flip side of mutual funds as well. In this article, I will discuss Do’s & Don’ts of Investing in Mutual Fund.
Every investment option has pros and cons of investing. Mutual Fund is a great product for the beginner who wants to start investing for better returns. better means, higher than the bank’s fixed deposit return.
I will not waste time discussing what is a mutual fund? I guess you already have a fair idea about it. So let’s directly jump on the Do’s and Don’ts of investing in mutual funds in India.
Do’s & Don’ts of Investing in Mutual Fund
First, we will talk about all the dos of mutual funds and then we will discuss what not to do with mutual funds for better returns.
Define a Goal
You must have a goal for which you are going to invest in a mutual fund. Without any goal, it is just like you are investing without any reason because you have spare money with you. If you invest without any future goal, I am sure you will not continue for more than 2 years.
Defining a goal is like doing a reverse calculation. For example, if your future goal is to send your child abroad for further study. The goal is still 10 years away from now. And the expected future expense would be around 1 crore.
So you need to start a SIP for 45000 for 10 years at the expected rate of return of 12% per annum. This way you will be able to meet your future goal certainly.
Invest Only Your Surplus Fund
A mutual fund is a long-term investment avenue. You should always keep this in your mind before investing any amount into it. It will give you good returns in the long run only so you should invest only your surplus amount into it. If you are going to need the fund in short term like 4-6 months, then don’t invest in a mutual fund ever. Not even in liquid funds. Because liquid funds are also risky.
The mutual fund investment is like PPF investment, it will compound your return in the long run only.
The first step of investing in a mutual fund is to start a SIP for your goals. Now you must be thinking of where to start the SIP. There is a lot of online platforms which offer great options for starting SIP. I have written a comprehensive article on the best mutual fund investment platform in India. Go and check the various online platform and select the best suitable for you.
SIP helps you to average your buying cost as it will factor out all the ups and downs of the market. Also, you can anytime pause, modify or stop the SIP as per your wish and circumstances.
Invest in Direct Mutual Fund
There are two types of mutual fund schemes available in the market. one is regular mutual fund schemes and another is direct mutual fund schemes. In regular mutual fund schemes, there is a distributor and investment agent who will get a commission out of your investment.
While in the direct mutual fund schemes there is no commission is paid to any of the distributors or investment agents. So there will be a slightly higher return in direct mutual fund schemes.
Invest in Index Funds
It is proven that index funds are better options for mutual funds as compared to other schemes. No other mutual fund scheme can beat the performance of index mutual funds. Index funds follow the BSE and Nifty indexes and replicate the same. It invests in the same companies that are there in indices.
Nifty 50 has given a 16% average return since its inception. No other mutual fund has ever beat this performance in a long run.
Evaluate Tax Benefits
If you want to claim your investment for deduction under income tax, you should invest in ULIP funds. ULIP funds are a type of mutual fund in which you have to invest an amount for at least 3 years. You will get tax benefits on the amount you have invested in such schemes.
Be realistic About the Returns
A mutual fund is not a magic wand that can do wonders for you. It is also not a cheat fund that promises to double your investment in 2-3 years. It is a systematic investment plan through which one can create wealth in the longer run. Don’t invest in mutual funds for the short term, because short term market can go in any direction. So there is a risk of losing your money in the short term.
Now let’s also check the things that you must avoid while investing in mutual fund.
Don’t Invest for Short Term Gain
As I mentioned above, don’t invest in mutual funds for short-term gains like monthly or quarterly returns. Mutual funds are not meant for that. There are times when your fund is performing very well in the short term, don’t withdraw your money from the fund for such gain. Rather wait for a long time and see your wealth is going up.
Don’t Ignore the Market Risk
Always remember the mutual fund disclaimer. There is a risk in any investment option so as with the mutual fund schemes. Though in long run, the return would be better still there is no guarantee that in long run also you will get good returns. The mutual fund investment is directly linked to the capital markets.
Don’t Exit the Mutual Fund in Bear Market
Since mutual fund investment is linked to market performance, there will surely a downtrend in the market. Under such a situation, you should not withdraw your money from mutual funds. Rather, if you have spare money then you should do a lump sum investment to average your buying cost.
So when the market will bounce back (and it will surely), your portfolio will also increase in a better way. Here you need to control your emotions while the market is down. Buy right and sit tight is the mantra you should adopt.
The mutual fund investment is a good option for people who don’t know much about the markets but still want to make money. It will give you a good return in the long run but still, there is no surety of the return in any investment. The best advice is to invest in a mutual fund based on your future goals and risk appetite. Hope this Do’s & Don’ts of Investing in Mutual Fund will help you to make an informed decision while investing.