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A beginner’s guide to mutual funds - 5

Know your basics
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Know your basics

Here is the scoop: you should always remember that you are choosing mutual funds to achieve your financial goals. So, start with identifying your various financial goals. Next, find out how much time you have to achieve those goals. Finally, assess your risk taking ability.

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Never ignore this rule
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Never ignore this rule

Now that you know your goals, you should divide them into two: short-term goals and long-term goals. You should always choose safer options like bank deposits and debt mutual funds to achieve your short-term goals that need to be achieved within three or four years. For long-term goals that need to be taken care within five to seven years or more, you may consider investing in equity mutual fund schemes.

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Don’t be shy, but not adventurous
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Don’t be shy, but not adventurous

Debt for short-term goals and equity for long-term goals might sound commonsensical approach and very basic to you. But it is one of the often forgotten or neglected rules that mars many portfolios. When you choose a risky investment (it could be risky debt or equity schemes) to meet your short-term goals, you are taking a huge risk. If the investments are badly hit, you won’t be able to achieve your goals. Since you are investing for a short period, you don’t have the luxury of time to recoup your losses. In fact, this is the reason why equity is recommended only to long-term investors. Even if the investment is hit by a bad phase in the market, they have time to make up for the short-term losses.

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Never underestimate risk
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Never underestimate risk

Most investors assume they have very high risk appetite when the market is going great guns. Only when the market hits a rough patch and investments start losing value, they realise the real meaning of risk. That is why it is extremely crucial to choose debt and equity mutual funds based on your risk profile.

Also read:
A beginner’s guide to mutual funds – 2
A beginner’s guide to mutual funds - 3

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Focus on long-term record
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Focus on long-term record

Do not choose schemes that are on top of the chart in a month or year. Always look for long-term record. See how it has delivered during the bull and bear phases in the market. You should remember that managing the downside is equally important. Look for consistency above flamboyance. Also, look at the overall record of the fund house and fund manager.

Also read:
A beginner’s guide to mutual funds – 1
A beginner’s guide to mutual funds - 4

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