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Top 10 Tips on Investing in Mutual Funds

While mutual funds are quite popular, selecting a fund or building a portfolio can be tricky for most investors. Mentioned in this post are ten tips that can help you create the right portfolio by selecting the best mutual funds for yourself. Keep reading.

Over the past few years, mutual funds have emerged as a popular investment choice. Administered by Asset Management Companies (AMC), mutual funds are used for investing in equity, bonds and related investments.

Mutual funds are managed collectively by professional fund experts and have higher return potential than many traditional investment options such as bank deposits – fixed/recurring. However, with different types of mutual funds available in the market, the investment process may be overwhelming for a new investor.

Following top ten mutual fund tips can guide you through the investment process:

  1. Clarity on Investment Goals:

    To earn maximum returns from mutual funds, you must have clear financial goals. If you are a new investor, consulting a financial advisor can be a good option. If you wish to do it yourself, try to assess a few key factors such as:

    1. Your financial goal

    2. Your retirement plan

    3. The period for which you want to invest

  2. Analyse Different Types of Mutual Fund Schemes:

    As per your objective and period of investment, analyse different schemes. Mutual fund schemes can be commonly classified based on various factors.

    1. Mutual Funds Based on Asset Class:

      Choose betweenequity fund , debt fund, and hybrid fund.

    2. Mutual Funds based on Investment Objective:

      Choose between growth fund, liquid fund, income fund, tax saving fund.

    3. Mutual Funds Based on Structure:

      Choose between open-ended funds and closed-ended funds.

  3. Decide Your Risk Tolerance:

    Assess your risk-bearing capacity before investment. There are various schemes available for conservative investors, moderate risk-takers and high-risk takers. Your risk profile depends upon various factors such as

    1. The number of dependents and earning members in the family,

    2. Your age and employability,

    3. Your capital base, etc.

  4. Build a Well-diversified Portfolio:

    There may be mutual funds that invest primarily in blue-chip companies, whereas others may target specific segments such as banking, real estate, etc. Some mutual funds can offer a mix of debt and equity funds for more flexibility as per your requirements. You should select the appropriate mix and profiles for improving the chances of getting valuable returns. In case, you are only going to invest in one or two mutual funds, try to look for one that lets you diversify across sectors, and asset class. For instance, equity-oriented hybrid funds will give you balanced exposure to both equity and debt.

  5. Understand the Tax Laws:

    In investments, a Rupee saved is a Rupee earned. Thus, while you pay attention to the return potential and risk possibility of the funds, also look at the tax liability. There are a few tax laws that you should know about when investing in mutual funds.

    1. Long-term Capital Gains Tax (LTCG):

      While equity funds are liable for an LTCG tax of 10% on the capital appreciation, LTCG on debt funds is as per the income tax slab of the investor in a financial year. Also, debt funds held for more than 36 months are considered long-term. On the other hand, equity funds need to be held for only 12 months or more to be considered as long-term investments.

    2. Short-term Capital Gains Tax (STCG):

      STCG on debt funds is charged at 20% on capital appreciation after indexation. STCG on equity funds is 15% without indexation. While debt funds held for lesser than 36 months are considered short-term, equity funds held for less than 12 months are considered short-term funds.

    3. Deductions Under Section 80D:

      Tax saving equity funds or ELSS (Equity Linked Savings Schemes) allow you to deduct up to Rs 1,50,000 in a financial year for the equivalent amount invested in ELSS with a minimum lock-in period of 3 years. Thus, you get a tax advantage on not only the capital appreciation but also the invested amount.

  6. Investing in SIPs (Systematic Investment Plan):

    One of the simplest ways to invest in a mutual fund is through SIP. Here you need to invest a fixed amount every month and get allocated a certain number of units, as per the NAV. It comes with a lock-in period that helps to ensure discipline in investment

  7. Consider Schemes Focusing on Long-term Growth:

    You can expect better returns from long term plans with a period of at least five years or more. The equity markets may fluctuate more in a short duration but generally trend upwards in the long-term.

  8. Know When to Exit a Mutual Fund:

    Just as entering a mutual fund is important, it is also essential to know when to exit a fund. Investors often make the mistake of exiting a fund when the market enters a bearish phase. This is not a recommended strategy. Capable fund managers know how to over-rise a bearish phase and in fact, use it to their advantage. On the flip side, it is also essential to know when to exit a mutual fund. There are a few cues to follow, such as:

    1. When the fund consistently performs poorly for a long time

    2. When the fund changes its investment objective that may not be in line with your goals

    3. When you want to make structural changes to your portfolio

    4. When you have achieved the set financial goal from a fund

  9. Periodic Portfolio Review:

    There may be funds in your portfolio that are promising and high-performing. Similarly, there may be funds that are not performing as per your expectations. You need to keep a close eye and periodically review your portfolio to consider reallocating your funds to better-performing assets. This will help you maximise the chances of higher returns.

  10. Get professional help:

    Consider getting help from a financial advisor who can guide you in selecting the appropriate fund as per your needs and takes care of the investment process. Also, some mutual funds companies can help you pick, compare, choose and invest in different schemes.

Invest Smartly, Invest Wisely

You must be aware of the above-mentioned mutual fund investment tips to get valuable returns on your investment. Mutual funds have the potency to generate good returns, but the associated risk should also be considered and understood well before investment. A detailed understanding of different schemes, investment in a diversified portfolio, awareness of the market and regular monitoring of investment helps in getting better control over your funds.