Our official Facebook page is flooded with queries from our readers about how they can start investing in mutual funds. Some of them want to benefit from the recent sharp fall in the market, while some others want to know how they can invest in mutual funds to take care of their long-term financial goals. Other queries are mostly from readers who want to know our opinion about their portfolios.
We believe that it is always a good time to invest in equity mutual funds. That is, if you are investing to take care of your long-term goals like retirement, children’s education, etc. It is never a great idea to base your investment decisions on the prevailing conditions of the market. This is because you have a fulltime job and you will not have the time and energy to get in and out of your investments based on the conditions in the market. Anyway, that is also not the way to maximise your returns.
Should you go ahead now or wait for some more time? Here is the truth: do not wait for the right time to start your investments. You will never get in and out of the market at the so-called right time. In fact, there is no need for it. If you get in at some point and continue with your investments for a reasonably long period, you will be able to make money. So, don’t try to chase the elusive strategy: buy when the market is low and sell when it is high.
We always ask novice investors to do some basic financial planning before starting investing in mutual funds. One, create an emergency fund. This should take care of your living expenses of at least six to 12 months. If you have financial dependents or you are working in a sector that sees a lot of job loss, you should have a large corpus. Next, you should have an independent health insurance cover of at least Rs 10 lakhs for you. All your dependents should have an independent health cover. Third, you should also have an adequate life insurance cover if you have financial dependents. The life cover should be able to take care of the upkeep of the dependents if something happens to you.
Once you have these things in place, you may start by identifying various financial goals. List the goals and find out how much money you need to achieve each of them. Once you know the current cost of the goal, you should try to find out how money you would need to achieve them after the required time. You should inflate the number with an annual inflation to find this. Once you know your target corpus, you can calculate how much you need to invest every month to achieve it.
As a rule, always invest in safer options like bank deposits and debt mutual funds to take care of your financial goals below five years. For long-term goals, you can start investing in equity mutual funds. It is extremely important to choose debt mutual funds based on your investment horizon and risk appetite. For example, you should invest in a liquid scheme if you are looking to park money for a few weeks. If you are investing for a year or two, you may go for short term mutual funds.
Similarly, you should always choose equity mutual funds based on your risk profile and investment horizon. If you are investing for five to seven years and you have a conservative risk profile, you should stick to large cap mutual funds. If you have a moderate risk prolife and you are looking to invest for five to seven years, you should invest mostly in multi cap mutual funds. If you have a very high risk appetite and looking to invest for seven to 10 years, you may consider investing in mid cap mutual funds.
We do not think new investors should invest on their own in direct plans of mutual fund schemes. We have been noticing that most direct or DIY investors do not educate themselves about the stock market or mutual funds, they often go from one forum to the other or one expert to the other looking for solutions to their problems. Most of these advice would be based on the information provided in the forum, they are often general in nature. Only an advisor who would spend a lot of time with you, taking down a lot of your personal details, would be able to offer you a personalised advice.
Our critics believe it is always better to start on your own and learn through trial and error method. However, we believe that it is better to go through an advisor and learn the ropes before taking things into your hands. Learning about mutual funds is not very difficult – you can learn enough to take care of your investments if you have the time and inclination. However, until you learn enough, let an expert take care of your investments.
If you want to know more about mutual funds, you can visit our official Facebook page, and post your queries. We will get them answered by experts.