If you are investing in mutual funds for the very first time, there are quite a few things that you should keep in mind. Mutual funds are basically collections of bonds and stocks that are managed by professionals in the industry. If you are planning to start investing in mutual funds, you should definitely consider these factors-
- Purpose- You should always have a well-defined investment goal or purpose. It can be buying a house, car or something else or even taking care of your child’s education/wedding. It can even be building up a corpus for your retirement. You should be clear about the amount that you are striving to create and the time period in which the same is needed. Decide on the year when you will require the maturity amount.
- Documents- All your transactions should be properly documented. You should have all KYC documents like your date of birth certificate, proof of address, PAN Card and other details. Having an Aadhar card can make it easier to create accounts in a paperless manner via e-KYC systems.
- Risks- You should always keep in mind that mutual funds come in several types and there are varying risk proportions. You should invest based on your own risk taking abilities and appetite. The highest returns always equate to the highest risks.
- Scheme and Investment Mode- Have a long-term plan and take help from a financial expert to select the scheme you will invest in. You have to choose between debt/liquid/equity/hybrid mutual funds and the option to be chosen varies between growth/reinvestment/payout of dividends. The strategy has to be chosen, i.e. lump sum amount/SWP/STP.
- Choose the option wisely- If you are looking to fulfill a dream which needs a big sum of money, you should choose growth while if you require profits periodically, you should choose the dividend option. Work out how often you require the money and choose the option accordingly.
- Balancing the Portfolio- You should always have a horizon for your financial goals. When you are closer to your retirement age, you should lower stock exposure in order to ensure better capital security. A neat method is to subtract your present age from 110 in order to work out the percentage of your investment portfolio that you should have in stocks and adjust this depending on your risk appetite and other factors.
- Lowering Costs- It is always better to choose a direct mutual fund plan. Mutual funds come in regular varieties where commissions are transferred to your bank account or financial advisor. Direct plans are those where there are no commissions paid out to any individual. The commission that you save is added to your own corpus.