How to Plan Mutual Fund Investments

#AD

Mutual funds are among the most popular investment avenues for financial growth. However, while they offer numerous benefits, they come with an inherent risk as they are linked to the market. This means that market movements or fluctuations influence your returns.

But with proper planning, you can minimise your risk exposure and maximise the growth of your investment. From assessing your risk tolerance to understanding the risk and objective of the scheme, there is a lot you can do to position yourself so as to get good returns.

Read on to learn some tips to help you plan your investment in mutual funds.

Assess Your Objectives and Risk Tolerance

One of the key aspects of planning any investment is understanding your goals and ability to take on risk. Doing this lets you know how much you need to invest, the tenor you should invest for, and the scheme you should invest in.

For example, you can choose a low-risk scheme if you have a low risk tolerance. You can use online return calculators that give you an estimate based on your investment terms. This estimate allows you to understand the specifics of your investment and invest accordingly.

Choose a Fund That Aligns with Your Goals and Risk Tolerance

For your investment to be fruitful, the scheme you choose must align with your objectives and risk appetite. If it does not, there is a high risk that you may not get the desired returns.

This is because the fund allocation varies depending on the scheme’s objective and risk exposure. Low-risk schemes generally have investments in instruments that have a low risk or fixed income. If the fund’s objective is long-term wealth generation, the allocation will also change.

For example, if your goal is for the short term and you invest in a long-term growth scheme, your returns may not be ideal. Generally, long-term wealth generation schemes have allocation in instruments that deliver results over time and not in the short span.

Similarly, investing in a high-risk scheme can be stressful if you have a low risk appetite. This is because high-risk mutual funds generally see more fluctuation in returns, which may put you under stress and discourage you from seeing through the term of your investment.

Understand the Different Mutual Fund Schemes

AMCs (Asset Management Companies) offer numerous schemes, varying based on the market cap, asset classification and other factors. Understanding these schemes and how they affect your investment will help you choose the right fund.

For example, multi-cap funds offer diversified investments. As such, they may be ideal for new investors and/or investors with low to medium risk tolerance. This is only possible for you to know and choose when you take the time to understand the features of different mutual fund schemes and the differences between them.

Create a Diversified Portfolio

Your investment portfolio has a significant impact on the risk and returns of your investment. If you put all your eggs in one basket, i.e., all investments in a particular scheme or instrument, you jeopardise your returns.

If the sector or instrument performs badly, your entire investment performance goes south. However, if you have a diversified portfolio, you can offset the poor performance of a sector or instrument against that of the well-performing one.

For instance, equity schemes and debt schemes can balance each other, and you can change their proportion based on your risk tolerance during different stages of life.

Consider the Pros and Cons of Direct and Regular Funds

AMCs offer two types of every scheme, direct and regular. Direct schemes are the ones where you invest directly with the AMC. Regular schemes are where you invest in mutual funds via an intermediary.

In direct schemes, you don’t get guidance from financial advisors, but the expense ratio is low. However, in regular schemes, you get guidance from financial advisors, but the expense ratio is high.

Since both schemes impact your investment differently, understanding the pros and cons is crucial in making informed decisions.

Decide Between a SIP and Lumpsum Investment

There are two investment modes through which you can invest in mutual funds. One is lumpsum, where you make a one-time investment of a substantial amount. The other is SIP (Systematic Investment Plan), where you make monthly investments in a scheme for your desired tenor.

Generally, lumpsum investment can result in immediate returns as the investment amount is high. However, the loss can be equally high if the fund performance is poor. In SIP, you may not see immediate returns, but you also have low risk in case of poor performance.

Moreover, lumpsum investments are generally of a substantial amount, and as such, you may have to save, which can take time. On the other hand, you can start a SIP with as low as ₹500. Given this, you need to carefully understand and assess which is the ideal mode for you.

Account for Taxation

Every investment, whether in multi-cap funds or other avenues, is subject to taxation. This depends on when you redeem your funds or the tenor for which you hold the investment. Generally, you will have to pay capital gains (long or short-term) on the amount you redeem.

Since taxes reduce your returns, it is crucial to account for them to ensure you have desired funds during redemption. Additionally, you can invest in tax-saving schemes if you want to save on tax.

However, it is crucial to remember that the investment terms are different for such schemes. For example, ELSS, one of the most popular tax-saving schemes, has a lock-in period during which you cannot redeem funds. As such, accounting for taxation is important.

Monitor Your Investments Periodically

Knowing when to enter and exit a mutual fund scheme is pertinent to getting the best returns while ensuring the security of your investment. One way to achieve this is by keeping an eye on your investment. This will help you understand the fund and market performance, which will enable you to make the right decision.

In addition to the above tips, you also need to look at the fund’s past performance. This will help you get better insights into the returns you can expect from the scheme and invest accordingly.

Armed with the tips above, remember to diversify your portfolio with other investment avenues. For example, you can choose FDs or gold along with mutual funds. This further helps minimise the risk and protects your investment.

You also need to remember that when it comes to investing in mutual funds, starting early can bode well. This is because of the compounding effect wherein the longer you stay invested, the higher the chance of good returns.

*****

Disclaimer: The information provided in this article is for educational and informational purposes only. It does not constitute financial advice, investment recommendations, or legal guidance. The content is not intended as a substitute for professional consultation. Always seek the advice of qualified experts or professionals before making any financial decisions. The author, publisher, and website do not assume any responsibility for any financial consequences arising from the use of this information. The reader is advised to perform their own research and due diligence before making any investment decisions.