Wealth Guide: Mutual Funds/SIP - Dos and Don'ts for first-time investors

Mutual funds are gaining popularity on the back of the declining bank interest rates and an increase in financial literacy among Indian savers. Mutual funds are an excellent investment option for retail investors to park their savings. Investing for the first time in the securities market can be intimidating and confusing. If you do not have expertise in investing directly in various securities, then investing in mutual funds is a good option. These funds are professionally managed by fund managers and are heavily regulated by the Securities and Exchange Board of India (SEBI). Thus, the chances of fraud are negligible and most mutual funds are open-ended, which means investors have the option to withdraw money in case of need.

Savers have been moving their savings in mutual funds through Systematic Investment Plan (SIPs), which helps in investing in a disciplined manner without fearing the market volatility and timing the market. It is important to follow the principle of asset allocation as different types of asset classes such as equity, debt, gold, etc. are available within mutual funds. Hence, investors can achieve desired asset allocation within mutual funds.

‘Mutual Funds are subject to market risk’ is a commonly heard phrase. So, here in this article, Anurag Garg, Founder and CEO, Nivesh.com, shares his knowledge on Mutual Funds/SIP and suggests some ground rules to keep in mind when investing in mutual funds for the first time.

Advising Dos for first-time Mutual Funds/SIP investors, Anurag Garg, suggests:-

• “Define your financial goals, time horizon, and the amount required before investing in mutual funds. Investors should also take into account the impact of inflation on the target amount. Understanding the time horizon is particularly important to select the right asset classes. Therefore, it is essential to align SIPs in mutual funds with envisioned financial goals.

• Understand your risk tolerance levels to digest the volatility in the market. The risk profile of the investor can also be linked to how important the financial goal of the investor is. Therefore choose appropriate assets according to your risk preferences and investment horizon.

• An investor should understand the characteristics, expense ratio, and other charges before investing in the fund. They should also figure out the fund’s investment strategy and objective in the product leaflet or rule book or read it on the mutual fund’s website.

• Avoid investing a lump sum amount in mutual funds especially in equity-oriented schemes. If you invest the entire amount all at once, you risk buying units at a costlier price. An investor should, therefore, prefer SIP investment over lumpsum mainly because of lower investment requirements and average cost.

• Invest in mutual funds through a long-term perspective. You would be able to easily achieve your long-term goals with a small, regular investment over a long period due to the power of compounding.

• Keep a track of the fund’s performance in market boom and crash. Movement in the market and external environment scenarios could have an impact on your investments, for example, when the interest rates are rising, investors should not invest in longer maturity debt-oriented schemes, as these investments carry a higher interest rate and hence won’t be profitable when the economy is growing.

• An investor should have an idea of the taxes before investing in mutual funds. Tax implications are the same whether the amount invested is as a lump sum or through SIPs. Post-tax returns are more important as compared to pre-tax returns.

Suggesting Don'ts for first-time Mutual Funds/SIP investors, Garg, added-

• Don’t think of mutual funds as some kind of wealth-generating machine. Choose to redeem your fund only when you have achieved your financial goal. It requires patience and discipline to continuously invest in mutual funds for a long period.

• A lot of investors start timing the market, trying to get out while it is still relatively high, and re-entering when it is low. Always keep in mind that timing the market is way too complicated and in most cases, it never works. You should continue SIPs irrespective of the market conditions.

• Avoid investing in close-ended mutual funds (except for ELSS, which is required for tax-saving purposes). Once you have invested in a close-ended mutual fund you have to stay put for a specific number of years. Even if you have an emergency or you feel that the fund’s performance is coming down, you do not have the option to redeem your units. Liquidity has its value!

• Don’t base your investment decision only on the past performance of a mutual fund scheme. It is important to understand what the future holds and invest accordingly.

• Don’t invest in a mutual fund scheme based on peers’ discussion or hear-say. You should take an objective before committing your funds.

• Don’t invest in a mutual fund scheme based on tips received from social media or news channels. Before you commit your funds, do your research properly, analyze the fund’s performance and ask relevant questions.

• Don’t discontinue SIPs during volatile market conditions. One of the main benefits of SIP is rupee-cost averaging, SIPs will fetch more units when the market is low and fewer units when the market is high and the two will balance out each other. The power of compounding will also help you accelerate your wealth.

• Having negative returns in your portfolio might not be a desirable feeling when the markets are down, but it is important to persist with the investments.

“Following the above points will go a long way in ensuring that you achieve your financial goals timely and still have a healthy corpus for emergencies and retirement. Happy investing,” Garg concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)