Starting to invest in mutual funds can feel scary for new investors. However, learning about the process and following simple steps can help them become more confident and financially successful.
Mutual funds are professionally managed investments that allow investors to own a mix of stocks, bonds, and other securities. They are helpful for those who lack expertise or the time to research the financial markets but still want to build long-term wealth.
Set financial goals and assess risk tolerance
The first step is to set clear financial goals, such as saving for a house, building a retirement fund, or funding higher education. Next, investors need to determine how long they want to invest. It is also crucial for them to figure out how much risk they are willing to take.
For instance, equity mutual funds have the potential to earn higher returns but are riskier in the market and are thus suitable for young or long-term investors. Debt mutual funds are less risky and volatile, making them suitable for short-term or risk-averse investors.
Hybrid funds are a combination of equity and debt funds, combining risk and reward for moderate-risk investors.
Understand how mutual funds work
Mutual funds combine the capital of multiple investors, which grants them access to a large portfolio of assets that is professionally managed by experienced managers. This diversification reduces risk and can provide a wider opportunity to generate a profit, rather than investing in a single stock.
There are two categories of funds: actively managed funds, whose managers actively try to outperform market benchmarks, and passively managed funds, such as index funds, whose managers mirror benchmark indices and are generally less expensive.
Different modes of investment: Lumpsum or Systematic Investment Plan (SIP)
Investors can begin investing in a mutual fund with a lumpsum amount or an SIP, where a specific amount is invested periodically.
SIPs are beneficial for new investors since they facilitate disciplined investment behaviour, minimise volatility-driven losses through rupee-cost averaging, and can be accessible with lower amounts. A calculator, such as an SIP calculator, can estimate future corpus and help set realistic investment goals.
Completing Know Your Customer (KYC) and choosing the ideal platform
New investors should create an investment account through a reliable platform or a mutual fund firm. To complete the process, KYC is a necessary step in India. Once investors create an account, they can view and compare various mutual funds based on risk, return, fees, and track records.
Monitoring and staying disciplined
After investing, an investor should review their portfolio at least once a year and adjust it according to their evolving financial goals or situational changes.
They should remember that with patience, mutual fund investments can be most rewarding when investors hold them for longer periods, allowing compounding to give them an edge.
Conclusion
New investors can confidently embark on their mutual fund journey by starting small, utilising SIPs, and making the most of tools such as an SIP calculator, all while maintaining a clear and resolute mindset.
Through systematic investments, thoughtful fund selection, and regular reviews, investors can steadily build wealth and achieve their financial goals with mutual funds.