Here is how a first time investor should look at starting investing in mutual funds-
1. Define your horizon- Any investing avenue cannot be selected till you are not aware of your investment horizon. Many a times when you when you make investment without any specific goal behind it you get inclined towards the returns and so you get lured by the best funds of today. Such decisions has higher probability of going wrong. So it’s wiser to define clearly what is the time period you can hold your investments i.e. when you will liquidate this money. This specification will tell you whether you are looking for a short term, medium term or a long term investment.
2. Assess your risk tolerance- Each one of us has our comfort ability with volatility of markets. We may divide it into aggressive, moderate or conservative but there are host of factors which decide this. While making your first investment if you have dependents or liabilities then you may not be too aggressive. Similarly if you are starting when you are young and no dependents then you can afford to be aggressive. Also your awareness about asset classes may have an impact on your tolerance for volatility. So you need to analyze how much volatility in your investments you will be able to tolerate.
3. Choosing the scheme- There is no second thought that asset allocation is the right approach for making your investments. But when you are starting small you may be looking to gain exposure to equity market with this investment. If such so then starting with a balance funds is a good choice. With a judicious mix of equity and debt they are able to deliver good performance and keep your downside protected. But what if you need to create an investment portfolio. How should you do it first time and what schemes you choose. Here you should build this portfolio gradually. Your debt investments have many choice like PPF, EPF etc.. and so factoring these you can decide to invest in debt mutual funds. Within equity it’s wiser to start with few large cap schemes along with balanced mutual funds scheme initially and add other categories as you become more aware with mutual funds. For a larger portfolio it’s advisable to take assistance of a financial planner so that you do not make a mistake.
4. Avoid aggression - Many times when investing for first time you get lured by the exceptional returns from a particular fund or advised to invest in a sector which is going to do well. All this is fine till you have sufficient knowledge. Even then taking a risk higher than your tolerance will a have higher probability of giving you opposite results. So avoid high risk categories on first investments. It’s important that you have a control on your expectation and build it around your financial goals. Start with a diversified fund like a balanced fund or large cap schemes and do not invest for higher returns. Stick to your investment objective.
5. Read before you invest- there is no dearth of information and when you are investing for first time it’s good to know a bit about it. Go through some good books or follow some blogs to get awareness about investing. Post your queries on blogs so that you get views of experts on your doubts. This awareness will help you in falling prey to misselling. You may not be able to analyze a fund deeply but a basic knowledge will tell you what approach to take and what questions to ask.
1. Define your horizon- Any investing avenue cannot be selected till you are not aware of your investment horizon. Many a times when you when you make investment without any specific goal behind it you get inclined towards the returns and so you get lured by the best funds of today. Such decisions has higher probability of going wrong. So it’s wiser to define clearly what is the time period you can hold your investments i.e. when you will liquidate this money. This specification will tell you whether you are looking for a short term, medium term or a long term investment.
2. Assess your risk tolerance- Each one of us has our comfort ability with volatility of markets. We may divide it into aggressive, moderate or conservative but there are host of factors which decide this. While making your first investment if you have dependents or liabilities then you may not be too aggressive. Similarly if you are starting when you are young and no dependents then you can afford to be aggressive. Also your awareness about asset classes may have an impact on your tolerance for volatility. So you need to analyze how much volatility in your investments you will be able to tolerate.
3. Choosing the scheme- There is no second thought that asset allocation is the right approach for making your investments. But when you are starting small you may be looking to gain exposure to equity market with this investment. If such so then starting with a balance funds is a good choice. With a judicious mix of equity and debt they are able to deliver good performance and keep your downside protected. But what if you need to create an investment portfolio. How should you do it first time and what schemes you choose. Here you should build this portfolio gradually. Your debt investments have many choice like PPF, EPF etc.. and so factoring these you can decide to invest in debt mutual funds. Within equity it’s wiser to start with few large cap schemes along with balanced mutual funds scheme initially and add other categories as you become more aware with mutual funds. For a larger portfolio it’s advisable to take assistance of a financial planner so that you do not make a mistake.
4. Avoid aggression - Many times when investing for first time you get lured by the exceptional returns from a particular fund or advised to invest in a sector which is going to do well. All this is fine till you have sufficient knowledge. Even then taking a risk higher than your tolerance will a have higher probability of giving you opposite results. So avoid high risk categories on first investments. It’s important that you have a control on your expectation and build it around your financial goals. Start with a diversified fund like a balanced fund or large cap schemes and do not invest for higher returns. Stick to your investment objective.
5. Read before you invest- there is no dearth of information and when you are investing for first time it’s good to know a bit about it. Go through some good books or follow some blogs to get awareness about investing. Post your queries on blogs so that you get views of experts on your doubts. This awareness will help you in falling prey to misselling. You may not be able to analyze a fund deeply but a basic knowledge will tell you what approach to take and what questions to ask.