7 things new Mutual Fund investors need to know

Mutual funds are an excellent tool that helps build your investment portfolio. But if you are new to the world of mutual funds, it’s essential that you first learn the nuances to reap maximum benefits.  Here is a list of seven things that you need to know to make the best investment decision:

1. Don’t time your investment:

It is impossible to time the market and make your investment. Therefore, avoid doing that. Mutual funds can provide returns over a period of time, irrespective of the market fluctuations. Develop a habit of investing a fixed amount regularly that will get more units of mutual funds even when the markets are bearish.

2. Look beyond NAV:

Many consider the Net Asset Value or NAV as an indicator of the performance of a mutual fund. However, it’s best that you do not look at NAV as the sole deciding factor. Fund management, historical returns from a mutual fund, market volatility are crucial elements that you should take into account. Make it a point to read the scheme information document and the key information memorandum thoroughly before you make a decision.

3. Seek help:

A well-formulated investment strategy will help you get good returns from mutual funds. If you find it overwhelming to come up with a plan on your own, seek help from professional financial advisors.

4. Stop looking for best returns:

It is not necessary to look for the best returns while selecting a mutual fund. Start by assessing your risk appetite and investment horizon and accordingly, choose a mutual fund that fits your profile. Excessive focus on returns without weighing in the risk involved can cost you dearly.

5. Diversify your portfolio:

Did you hear the saying “Don’t Put All Your Eggs in One Basket”? The same applies to mutual funds as well. It is important to diversify the mutual fund portfolio across different schemes which invest in different sectors/asset classes to minimize the risk. At the same time, don’t feel tempted to invest in every mutual fund scheme that comes your way. That can dilute your returns and prevent you from building a good portfolio.

6. SIP or lumpsum:

If you’re wondering whether to invest in SIP or lumpsum, you must first understand your reason for investment and check what will work better for you. Take your pick from the two modes of investment based on your profile. Opting for a SIP will be a better option as it instills the discipline to invest a fixed amount every month.  If you have sufficient surplus income, then you can consider a lumpsum investment, and can choose the suitable fund as per your requirement. You can also choose to invest a lump sum amount in a liquid fund and can choose to start the Systematic Withdrawal Plan (SWP) to an equity fund if planning to invest in equity.

7. Consider exit loads and expense ratios:

If you exit a mutual fund early, you may pay a penalty known as exit load. Typically, equity mutual funds charge an exit load of 1% if you exit within one year of investment. Debt mutual funds have varying exit loads. Similarly, an expense ratio is the fee charged by a fund house for managing the mutual fund. It includes operating fees, legal costs, service charges, etc. A very high expense ratio can reduce your returns. Therefore, ensure you consider the exit loads and expense ratios before investing in a particular fund. 

So, are you ready to start your mutual fund investment journey? Open a trading account with ICICIdirect now and get started.