7 Practical Tips for Investing in Mutual Funds

Summary: 

Mutual funds are a great way to invest in the stock market, but it's important to choose the right funds and invest for the long term. In this blog post, we'll share seven practical mutual fund tips to help you make informed investment decisions. 

A mutual fund is a collective investment scheme where you, along with other investors, contribute your money to form a substantial wealth pool. This collected capital is then managed by a professional fund manager who makes the investment decisions on your behalf. Mutual funds are becoming increasingly popular because they offer a hands-off approach to investing. They allow you to invest without the need for extensive market knowledge or active management. Now, whether you're already investing in mutual funds or considering getting started, these seven practical tips will help you make informed financial decisions.

7 successful tips for investing in mutual funds 

Here are seven successful tips to invest in mutual funds and maximise your returns:

• Invest according to your financial goals 

Your investment strategy should align with your life stage. In your 20s or 30s, consider growth-oriented funds that focus on equities, which could yield higher returns and allow you time to manage market volatility. As you near retirement, shifting towards conservative investments, such as bond funds or balanced funds, may be prudent for their steady dividend income.

• Look past the fund’s ratings 

Don't make a decision based on a mutual fund's star rating alone. Before you commit, take a closer look at its portfolio. Does it invest heavily in a sector where you're already heavily invested? Consider the fund manager's strategy for selecting assets. Are they seeking out companies with high growth potential, or preferring stable companies? The fund's approach must enhance your investment strategy and not merely replicate your existing portfolio. 

• Start systematic investment plans (SIPs) 

Through SIPs, you can invest a fixed amount at regular intervals. Your bank will then automatically handle the withdrawals. These plans take advantage of rupee-cost averaging, so you purchase more units when prices are low and fewer when they're high. This approach will, over time, average out the cost of your investments. 

For instance, if you start a SIP with INR 15,000 each month in an equity fund and the unit cost is INR 100, you will receive 150 units. If the unit price falls to INR 75 the next month, your INR 15,000 will get you 200 units. As time goes on, this strategy can lower the average cost of your holdings. It also removes the emotional aspect of investing, helping you avoid hasty decisions during market volatility and maintain a consistent investment pattern throughout market fluctuations. 

• Balance sector exposure 

To truly diversify, it's crucial to ensure that your mutual funds have distinct holdings. For example, if you're invested in two different mutual funds and both have a significant portion of their assets in the technology sector, a slump in tech stocks would negatively similarly impact both funds. This doesn't spread your risk effectively. To avoid this, you should balance your investments across a variety of sectors and asset classes. So, along with those tech-heavy funds, you might choose funds that invest in healthcare, utilities, or international markets, as well as different asset classes like bonds or real estate, to maintain a well-rounded portfolio. This way, if one sector experiences a hit, the others could potentially offset the impact.

• Consider tax implications

Understanding the tax implications of your investment choices can significantly impact your take-home returns. Each type of mutual fund comes with its own set of tax regulations. For example, in India, long-term capital gains from equity funds are subject to different tax rates compared to those from debt funds.

If you're in a higher tax bracket and considering a fund that generates significant interest income, it might increase your tax liability. Equity-oriented funds might be a more tax-efficient option due to their potentially more favourable tax treatment of dividends and capital gains. It's always wise to seek advice from a tax advisor who can clarify the tax aspects of various mutual funds, helping you make informed decisions that suit your financial situation.

• Focus on real returns 

When evaluating mutual fund performance, it's important to consider the real rate of return, which accounts for the erosion of purchasing power due to inflation. A fund that returns 8% when inflation is at 3% is giving you a real return of 5%, which is what truly matters for your wealth accumulation.

For instance, if you're considering a bond fund that projects a 4% return, but inflation is hovering around 2%, your real return is only 2%. Compare this with a more aggressive fund that might offer a 7% return with the same level of inflation, bumping your real return up to 5%.

• Adopt a long-term investment mindset 

Investing in mutual funds requires a long-term view. Market dips can be disconcerting, but they're often the worst time to sell. Having a long-term perspective helps you stay the course and not make hasty decisions based on short-term market movements.

Suppose you have invested in a fund that suddenly drops by 10% due to a market correction. If your investment horizon is 10 years or more, this dip is just a minor setback in the grand scheme of things. Selling out of fear results in actual losses, while holding on may allow for a potential recovery, as markets generally tend to rise over the long term.

So there you have it: seven golden rules for investing in mutual funds. Apply them wisely and set yourself on the path to a financially secure future.

Wrapping up: Key points to remember 

• Make sure your mutual fund choices match your financial goals and current life stage, whether you're aiming for growth or stability. 
• Spread your investments across sectors and asset classes to reduce risk and enhance portfolio resilience.
• Maintain a patient, long-term mindset when investing in mutual funds to weather market fluctuations and optimise returns.

Become a confident mutual fund investor with our expert guidance and resources.