Are you looking for a beginner’s guide to mutual funds? Then you will love this article. Here’s what you need to know before you buy your first mutual fund. Mutual funds have lower risk (and likely higher returns per unit of time for research) compared to stocks / securities of individual companies. This is because they are diversified and managed by competent professionals. However, this doesn’t mean that you shouldn’t do the research yourself.
There are a ton of mutual funds to choose from in the market (almost 12,000 at the last count). By reading up on the different types of mutual funds out there, you can make personalized, smart investments for maximum returns.
Here is a step-by-step guide to mutual funds that will help you figure out which type of mutual fund is best for you.
What is a mutual fund?
A mutual fund is a company that pools money from many investors and invests it in securities such as stocks, bonds, and short-term debt. The mutual fund’s combined holdings are referred to as its portfolio. Investors buy shares in mutual funds.
1. Select mutual funds based on risk / asset classes
There are different types of mutual funds based on different risk and asset classes. Here are different types of mutual funds:
Debt funds invest in government bonds, debt securities, and other such reliable assets. These are safe investments with fixed returns and very low risk. However, the income generated therefrom is taxable after income tax. Choose debt securities if you prefer safe, secured returns over other higher risk options.
Equity funds are invested in stocks and shares of companies in the financial market. They come with higher risks, but can also offer significant returns. It is timing dependent to some extent, and long-term investments can seem more worthwhile, especially when you get into dips. On the other hand, timing the market is a skill that most don’t seem to perfect. So maybe try out Systematic Investment Plans (SIPs).
are consolidated funds that consist of both third-party and equity investments. They are an ideal balance between return and risk. However, the risk-return equation depends on the composition of the fund. There is a higher risk if more than 60-70% of the fund is equity and only 30-40% is bonds.
However, this is a good investment option for new investors who want to invest directly for maximum returns but don’t want to expose themselves to increased risk.
2. Choose mutual funds based on your investment goals
Do you want to retire early or within the next 30 years? You should choose mutual funds based on your specific financial goals:
Cash and cash equivalents
Liquid funds are ideal for short-term investors who want to provide some cash for emergencies or upcoming financial burdens. You can get a moderate return by taking minimal risk in a very short amount of time.
Tax saving funds
Tax-saving funds are high-risk, high-yielding investments that are beneficial to investors seeking deductions from their annual income tax account. It’s a balanced investment, but at the same time it saves you your valuable tax money.
Capital conservation fund
Capital Preservation Funds are balanced between the stock markets and fixed assets (bonds / debentures). Your primary goal is to ensure that the original investment amount is retained despite the return / loss.
Pension funds, as the name suggests, are very long-term investments with the aim of amassing enough assets over the years so that the investor can survive and survive after leaving work.
3. Investing through SIPs (Systematic Investment Plans)
SIPs, or systematic investment plans, are a convenient way to invest in mutual funds when you don’t have the time to do a good research or the capital to make a large investment right away. In a SIP, you make investments at regular intervals (weekly, monthly, etc.), keep track of the consolidated amount, and add it every month. It is a convenient and hassle-free way to build wealth on a regular basis.
The advantage here is that the barrier to entry is quite low; There are systematic investment plans from just 500 / – month. We discussed how timing the market remains an elusive art, which is why SIPs are so popular. A SIP is based on the principle of averaging the rupee costs. As a result, your average mutual fund investment can get a generally lower value as you invest across dips and slopes.
4. Make money with a mutual fund
Mutual funds are considered a safe investment compared to technology stocks, which may be overvalued right now. So you can make money on this safe investment by doing the following:
If you don’t remember where you are from, then how do you know where you are going? It is always helpful to have a clear understanding of why you are investing before investing. This will help you choose your ideal mutual fund, how long you will invest in, your amount, and a number of other factors depending on your goals.
For example, if Aman wants to buy a car that costs $ 13,000 and he wants to buy it within a 3 year period while holding an equity of approximately $ 5,000; He now has a price breakdown of an investment plan to make enough money to meet the goal he set.
Set a timeline
The key to investing well is knowing how long you will be in the market. Indicate how long you want to invest. whether you want to build wealth in a short period of time or slowly accumulate wealth over a long period of time.
For short-term profits, equity funds are the best option. However, for long-term investments with substantial returns, balanced funds might be considered ideal.
Avoid starting loads
The financial markets are volatile. Investors often liquidate their assets when they see an opportunity to make a profit when there is fluctuation. However, mutual funds will charge you a fee if you redeem your shares too quickly. This charge is known as the “initial load”.
Constantly repaying your mutual fund’s shares and reinvesting in various schemes at frequent intervals could be a great way to time the market. However, think about the exit load between multiple systems – you are likely to lose a lot more money than you think.
As one of those imperatives of good investment practice, we have often spoken of diversification in our posts. While mutual funds themselves are inherently diversified investments, further diversification of mutual funds balances risk and return.
If you risk it all with a fund and that fund fails to perform for some reason – a bad manager, an unfortunate portfolio selection, or whatever – a large amount of your capital will be written off. To avoid such disasters, you should research several funds with good performance. Diversification not only minimizes the risk of total losses, but also increases the chances of excellent returns on long-term investments.
Eliminate the middleman
Investment in mutual funds is typically made through a financial distributor or advisor who will limit your profits and investment (or charge you a high fee for the advice).
How to buy mutual funds
Put simply, mutual funds are professionally managed investment portfolios that investors can use to pool their money to invest in something
Did you know there are websites out there that pay you to invest in stocks and mutual funds?
Yes, it is true. There are several companies that give you free money to invest in mutual funds. They include:
Robin Hood: This is a free investment app for your phone. I mean really free all round – join for free and they don’t charge you anything to buy or sell the stock. You can buy stocks like Apple, Ford, or Sprint free when you join through this link.
The value of the bonus share can range from $ 2.50 to $ 200 and fluctuates based on market movements. You have nothing to lose. I told you this is easy! Sign up here.
Good luck and if you need more resources, here are some things you can check:
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