INVESTMENT GUIDE SERIES PART – I
BASIC KNOW-HOW OF INVESTING IN MUTUAL FUNDS
Mutual funds are the investments where many participants pool their money to be invested and the professional fund managers manage that pool of funds. Mutual funds presently are gaining more and more popularity as they provide solution to few basic problems of the investors like:
1.Every investor wants to reduce the risk in Equity and Derivative market.
2.Every investor wants to earn more and much more than the prevailing inflation rates.
3.Every investor is not well informed about the prevailing trends in the economy.
4.It is not possible for the individual investors to track day to day rather hour to hour situations in the market.
The solution to all the above mentioned problems and for the investments to grow safely is that there should be a well informed, experienced and dedicated person to take care of investments. As employing a dedicated fund manager is not feasible for every investor. But in case of mutual funds lots of investors pool funds and there are dedicated fund managers for various types of investments like debt, equity and for funds related to various sectors of the economy. For investing in mutual funds, one should take care of following basic principles to maximize the gains and minimize the risks.
1 Personal liquidity/ creation of emergency fund
If the investor wants to get maximum returns out of the investments as planed then he should take care of his personal liquidity to avoid forced selling of the investments in case any contingency arises. Unplanned forced selling or redemption of investments is the most primary reason of loss or not harnessing the full gains of mutual fund investments. As a normal principle one should keep funds to the tune of 6 times of his monthly cash outflow in saving account or in short term investments which may be converted to cash readily.
2 Goal oriented investments
Individuals should define their personal goals like buying a car, planning a vacation, children education, children marriage etc along with time frame and funds needed for such goals. If one is clear about the corpus and time of the funds needed than it becomes easy to take a decision about the amount to be invested monthly or yearly for the goal along with choosing a fund to invest based on the returns and risk associated with the fund as per past results.
3 Diversified portfolio
The money available to be invested should be allocated to different types of funds so that any downward trend in a particular industry or a specific fund will not damage the entire investments/funds. This diversification may be based upon the type of securities (like equity funds or debt funds), time frame of the requirement of funds (short term and long term), industry specific funds (pharmaceutical, infrastructure, banking etc), and area specific (like rural sector). Diversification helps in minimizing the risks. In a well diversified portfolio funds should be selected in a way that each fund should have a specific role in a portfolio and these funds should be different from one another. There should not be much similarity between different funds in the portfolio otherwise there will be a risk of losing the money because due to similarity in nature all the funds may show downward trend in a specific adverse situation.
4. Indebted individuals to invest cautiously and logically in mutual funds:
As a general principle one should give preference to fast repayment of debts over investment in mutual funds. The decision should be based upon the rate of interest on loans and expected rate of return on investments. A debt free person enjoys peace of mind and can hold the investments as planned. Generally any one in debt trap sells the investments in a hurry if he or she faces even a small adverse situation. Slight ups and downs in income leads to problem in repayment of debts and for that purpose, the investment in mutual funds may be redeemed immediately in an unplanned manner. Even if the personal financial situation is ok but a slight adverse change in market or industry may result into less return or loss. Investment holding capacity of a debt trapped individual is generally low and he gets panicked with this slight adverse change. As a result the individual may sell the investments in an unplanned manner.
5. Selecting funds of different AMCs
Asset Management companies or the investment management companies perform the function of managing the portfolio of funds pooled by retail investors. These AMCs start various types of funds based on many parameters like industry, time horizon, region etc. It is generally seen that similar nature funds of different AMCs show quiet different results at any given point of time interval. Suppose a person wants to invest a part of his portfolio banking sector mutual fund. Then he may further diversify this portion by investing this part of portfolio in various banking sector funds with different Asset Management Companies.
In this series our next article would be Types of Mutual funds. Our readers may send their queries at info@businessmantranews.com # MUTUAL FUNDS INVESTMENTS # INVESTMENT CONSULTANCY # HOW TO INVEST IN MUTUAL FUNDS
