Five important tips to remember for rookie mutual fund investors

Since their launch, mutual funds have been a popular investment option for all investors – rookie, experienced or seasoned. However, irrespective of the type of investor, it is vital to understand the basics of mutual funds and build their knowledge to make smart and informed decisions. Especially, rookie or novice investors should carefully study the market and understand mutual funds and their investment strategies, expected returns, administration charges, potential risks, and several other factors before investing.

Here are five important tips that rookie investors should remember when investing in mutual funds:

1. Define your strategy: The first step for investing in mutual funds is to understand your investing strategy. For this, you need to specify your return expectations, risk tolerance, investment horizon, and financial goal. For instance, if you want high returns and can take high risks but have a short-term investment horizon, you can consider equity mutual funds.
2. Research is fundamental: As a rookie investor, you may have little or no knowledge about mutual funds. Therefore, it is best to do extensive research and study different mutual funds on factors, such as past performance, investment objective, fund manager, years of existence, expense ratio, assets under management (AUM), etc. Ideally, choose a fund, which is at least five years old, has delivered consistent returns, is managed by an experienced fund manager, and comes at a low expense ratio and other charges.
3. Check for risk alignment: It is critical to know your risk tolerance and understand if the chosen fund meets your risk appetite. For instance, equity mutual funds have a higher degree of risk, especially in the short term. But these mutual funds also offer significantly higher returns. Hence, if you have a high-risk tolerance, you can consider investing in equity mutual funds. However, if you have a moderate risk appetite, consider debt or balanced (mix of equity and debt) mutual funds.
4. Choose your investment medium and check the taxes: When investing in mutual funds, assess how much to invest and at what frequency. Here, you have two options – lump sum or SIP (Systematic Investment Plan). A lump sum implies you invest all your money in the chosen fund at once. SIP means you invest a fixed amount at a fixed frequency (daily, weekly or monthly). You can select the investing medium as per your budgetary ease. After considering all the factors, check the status of the taxes on your mutual funds. Generally, mutual funds are efficient in terms of post-tax returns. However, the taxation benefits depend on the type of mutual funds and the holding period. For instance, long-term capital gains above 1 lakh are taxed at 10% + 4% cess. However, short-term capital gains are taxed at 15% + 4% cess. Therefore, choose your investment duration wisely.
5. Focus on periodic monitoring: Mutual funds are not a one-time investment option. To maximize potential returns, it is vital that you periodically monitor the performance of the mutual funds. Use the Moneyfy app to monitor your mutual funds. Assess which type of investment is working well; check whether the fund has outperformed or underperformed against the benchmark, etc. This will help you rebalance your portfolio if required to evade losses or maximize return opportunities.

Conclusion

Investing in mutual funds can seem daunting at first. But once you begin, these easy tips can help you make sound decisions. Use the Tata Capital Moneyfy app to conveniently choose and track your mutual funds’ performances and make changes accordingly.