How to Invest in Mutual funds? Here are some Do’s and Don’ts to Set You on the Right Track!

Mutual funds let you dip your toes into the stock market, even if you don’t know the ABCs of stock market investing. However, choosing the right mutual funds can be a bit tricky, especially for first-time investors. Check out the best Do’s and Don’ts of mutual fund investing to avoid costly mistakes. 

Mutual funds are a great investment option, for all levels of investors. However, picking a winning mutual fund requires a bit of expertise. Here, in this post, you can find a set of do’s and don’ts that help you pick the best mutual fund investments in India.

Rules to Follow while Getting Started with Mutual Funds

Do: Opt for a SIP

For those who aren’t aware, a SIP (Systematic Investment Plan) lets you invest small amounts of money regular in your chosen mutual fund. The benefits of SIP are many – you can start even with a small sum, keep investing regularly, your returns get compounded over time and more.

Don’t: Invest a Huge Amount all at one Go

When you make a lump sum investment, you risk buying units at a higher price. If you’ve got a huge amount that you want to invest in mutual funds, split into smaller sums, and invest it over a period.
Do: Select a Fund after Reviewing its Performance

While choosing funds, make sure to scrutinise the scheme information document thoroughly. Don’t just pick a fund that others recommend. Instead, make sure that you track the performance of the fund over the years and other factors like expense ratio, market caps, the fund’s composition, current holdings and more.

Don’t: Invest in a Fund without Reading the Scheme offer document and Checking its Performance
This is one of the biggest mistakes made by first-time investors and even seasoned mutual fund investors. They just pick a fund recommended by a friend, a TV ad or a mutual fund sales representative. While picking funds, you have to ensure that the fund you’re choosing is in alignment with your financial goals and suits your risk profile.

Do: Be Patient

Get into the habit of monitoring your fund’s performance just once a year. Yes, you read that right, not every month. Withdraw from the fund, only if the performance has been bad consistently for a year or several years. Make sure you compare the performance of the fund with other similar funds to get a clear picture of its performance.

Don’t: Panic

As mentioned above, don’t make it a habit to check your fund’s NAV every single day. NAVs generally keep on fluctuating. What matters is you stay invested. Over the term of the fund, the losses cancel out, helping you end up ahead. 

Very often, mutual fund investors make the mistake of losing their cool and selling units in a rush. This way, you end up cancelling out the gains, the NAV could have made in the long term. The best advice given by experts is “To opt for a SIP and do nothing else.”

Do: Choose the Fund, based on your Risk Profile

Your risk appetite depends on several factors like your age, investment goal, other investments, time horizon and more. If you are looking to save for your child’s higher education, then you cannot afford to take risks on it. In such cases, a hybrid fund works better than an equity fund.

Similarly, if you’re a senior on the cusp of retirement, then you might prefer debt funds over equity. On the other hand, if you need regular income, then you can opt for funds that distribute dividends.

The key takeaway here is – Choosing a fund is an individual decision, based on your risk appetite. 

Don’t: Ignore Fund Expenses

Investors when figuring out how to invest in mutual funds, end up just looking at the fund’s performance. They fail to consider the expenses. Mutual funds charge fees from investors for various expenses like fund manager fee, transaction charges and more. 

Additionally, funds also charge an exit load, if you redeem your fund before a specific time period. While these charges are usually low, they can add up in the long run. Make sure to pick a fund with low expense ratios.

Final Thoughts

Mutual funds are a great way to build your nest egg. Make sure to use this comprehensive guide of Do’s and Don’ts to pick the best one that suits your specific financial objectives.

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