Life Lessons For DIY Mutual Funds Investors
Mutual fund schemes are Professionally managed investing services offered by Asset Management companies in which several investors pool their money for investments in different categories of assets such as stocks, bonds, real estate, commodities, etc.
Based on the past performance of over 2 decades, one can easily see that mutual fund investments had been extremely rewarding. However, it is not true for everyone. Most investors fail in creating decent returns simply because of their ignorance towards the potential risk on their investments in any mutual fund schemes.
Hence, as a DIY Mutual Funds Investors, you must have a defined set of rules to manage the risk in a mutual funds scheme.
1. Be aware of your risk appetite
Risk appetite depends on several factors like your income, expenses, liabilities, dependents, taxability, age and willingness. Hence, before investing in a mutual fund scheme, you must first determine your risk-taking ability and willingness.
It is often noticed that many of us make our investments in a mutual fund scheme simply on the suggestions from friends or colleagues without doing any research or understanding the risk in such mutual fund schemes. You may end up losing all your capital if you invest in this manner.Hence, one of the most important life lessons for DIY mutual fund investors is to evaluate various mutual fund schemes, you should read all the scheme related documents thoroughly before investing. By reading the scheme related documents you can know the objective, strategy and risk about the mutual fund you are thinking of investing in and decide if it’s suitable for your risk profile.
2. Do appropriate research
Investments done in mutual fund schemes on the gut feel or on the basis of past performance can be extremely risky. Moreover, you can lose money on your investments even after investing in the top performing scheme due to your own mistakes like investing a sum higher than your risk appetite, losing patience during the high volatility and timing the investments wrong.
It’s very important for you to know that during market boom, most mutual funds tend to perform well. And when the market corrects, schemes you invest in may give negative returns. Hence, investing without proper research may not be a wise approach.
You may use the data available in scheme documents such as Variance, Standard Deviation, Beta, Mod Duration, Sharpe Ratio, Treynor Ratio, Jenson’s Alpha, Tracking Error, etc to measure the risk and expected returns on investment in a mutual fund scheme and compare with other schemes.
3. Keep adequate liquidity
An individual who does not have sufficient cash in hand to pay for their daily expenditures or immediate liabilities may not be able to hold their mutual fund investments for a longer period. Cashing out on gains or booking a loss quickly due to lack of liquidity is not recommended for long term wealth generation.
You can overcome this challenge by creating an emergency liquid fund, having adequate Insurance cover and making provisions for all near term liabilities before planning an investment in a mutual fund scheme for a longer time horizon.
4. Avoid panic selling on market corrections
Investments are subject to market volatility in mutual fund schemes. When markets rise, your mutual fund investments go up in value. And during the market fall, the value of your investment goes down too. Selling your mutual fund units in panic due to poor performance in the short term isn’t the right way to invest.
Checking your unit NAV daily or weekly isn’t a good habit as it creates anxiety which forces you to liquidate a position as soon as it turns profitable or book losses when your investments don’t become profitable in spite of holding it for several days or weeks
5. Selecting investment options based on your financial goals
Mutual fund schemes offer investment options like SIP (Systematic Investment Plan), SWP (Systematic Withdrawal Plan), STP (Systematic Transfer Plan) and Lump Sum.
Choose an investment option based on your financial goal:
Wealth creation – It is a long-term goal and so it would be best to make mutual fund investments through SIP as you can avail the benefit of rupee cost averaging on the units you get.
Nearing Retirement – You may start mutual fund investments through STP which would ensure that the asset allocation from equities is reduced on a regular time interval and is adjusted to bonds and other debt instruments, ensuring reduction in risk at regular time intervals.
On Retirement – You may opt for mutual fund investments through SWP which would provide a regular withdrawal and a constant cash flow to manage daily expenditures.
Lump Sum – You may gift/donate Mutual fund units through a Lump Sum investment.
6. Keep an eye on taxes and expense loads
Both taxes and expense loads reduce investment returns. You should consider these two aspects during repurchases/redemptions and must assess the implications of capital gains tax and exit loads.
7. Don’t forget to add a nominee
While investing in mutual fund schemes, an investor often forgets to mention their nominees. Nomination helps the AMCs to transfer your investments to the legal heirs smoothly, which otherwise is a long and time-consuming legal procedure. You can add up to 3 nominees in a mutual fund application and also specific asset allocation to each nominee.
8. Don’t invest without proper guidance or learning
There are thousands of mutual fund schemes available for investment resulting in a problem of choice. Moreover, not everyone has the required knowledge of doing their own research. Some may not have the time and willingness to do the research and rebalancing.
Hence, it’s important you consult a AMFI Certified Mutual Fund Advisor who has the expertise and knowledge to assist you in mutual fund investments by providing advice on appropriate scheme selection, procedure to apply and withdraw from a mutual fund scheme and rebalancing your Portfolios on regular time intervals
