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What should I consider when investing in mutual funds?

1.What should I consider when investing in mutual funds?
Think of mutual funds as any other product. Now before making any purchase, you take your budget, your needs and the cost- effectiveness, among other factors, into consideration. You also consider product-specific factors such as the brand, utility, etc. Likewise, while investing in mutual funds, you must consider your goals, risk appetite, and income, etc, as well as fund-specific factors such as the track record of the fund manager, diversification, and so on. Before we delve into these factors, let’s first understand how mutual funds work.

Mutual funds pool in money from multiple investors and invest this money in securities like stocks, fixed-income instruments, gold, etc. There are different types of mutual funds; you can choose the one that best suits your risk appetite, financial goals, and investment horizon.

If you want to invest in mutual funds, here are some things to keep in mind:

-Understand the risk: Despite being considered one of the safer investment options by multiple investors, it is important to know that all mutual funds carry risk. However, you can choose the level of risk you prefer. Equity funds carry relatively more risk and can be suitable for investors looking to create capital over a long term of at least five to seven years. Debt funds carry lower risk in comparison and can help with capital preservation.

You must know your risk appetite and invest accordingly. For example, if you are young (in your 20s or 30s) and are saving for retirement, you can invest in equity for capital appreciation, but a few years before your retirement, you can move to debt to preserve your wealth and lower the risk.

-Choose the right investment mode: You can invest in mutual funds in a lump sum or via Systematic Investment Plans (SIPs). SIPs allow you to invest in mutual funds in regular installments. When you start a SIP, a pre-decided, fixed amount is deducted from your bank account at a chosen frequency. This amount is then invested in the mutual fund of your choice.

While lump sum investment can be a good way to invest any surplus funds that you may have, SIPs help you become financially disciplined. SIPs can also reduce your financial burden as you invest small amounts over time.

-Check the fund house’s track record: Make sure that you check the past performance and track record of the fund house and the fund manager. The fund house, also known as the asset management company, is the company that invests the pooled capital from different investors in other securities like stocks, bonds, gold, etc. The fund manager is the person who takes all the buying and selling decisions on behalf of the investors with an aim to earn profits.

Although past performances are not a guarantee of future growth, they can still give you a glimpse into what you can expect from your investments.

-Diversification is important: Diversification refers to not putting all your eggs in one basket. This simply implies that you should spread your investment amount across various funds instead of concentrating it in one. This will lower the risk and exposure to market volatility.

Mutual funds are investment vehicles that can help you reach your financial goals. But it is important to know a few things before you embark on your investment journey. If you are looking for more valuable information on choosing the best mutual funds, you can read this article: https://www.edelweissmf.com/investor-insights/mutual-fund-investment-tips-and-articles/how-to-choose-best-mutual-funds-for-sip

2.How should a person in their early 20s invest their money?
One of the most important things that you should know about investing your money at this age is that by the time you use this money in the future, inflation will probably be through the roof. Therefore, you need to pick an instrument that offers you returns that are higher than the rate of inflation, so you end up making a real profit.

Another thing to note is that since most people begin their careers in their 20s, it can be hard to invest a lot of money at once. Firstly, in your 20s, you could likely be in a relatively lower income bracket. Secondly, you may have expenses such as your credit card bills, monthly OTT subscriptions, etc. For these reasons and more, young adults must look for a flexible investment option that allows investing even with a small amount. A mutual fund investment can be a viable option in this case.

Mutual funds offer the option to invest money systematically through Systematic Investment Plans (SIPs). SIPs enable you to invest small sums of money at a chosen frequency. You can start an SIP with an investment amount that’s as low as Rs 500.

Wondering how that works? Say, you start a monthly SIP of Rs 1000 in the mutual fund of your choice. In this case, every month, your bank will transfer Rs 1000 to the fund house, which, in turn, will invest your money in different securities. This will enable you to invest a large amount over the years without any financial burden.

Here are some benefits of SIPs:

  • Power of compounding: When you invest regularly, the returns you earn are reinvested. This improves the chances of earning higher profits.
  • Small investments: You can choose small investment amounts and still earn profits without feeling pressured or having to alter your current lifestyle for the sake of your future financial security.
  • Rupee cost averaging: With SIPs, the fund manager buys more units when the market is low and fewer units when the market is high. This averages out the cost per unit over time.
  • Financial discipline: Regular investments tend to make you financially disciplined because you refrain from irrational spending and save as well as invest more.

Here’s an example to show you how to invest in mutual funds via SIPs:
Ronit, a 20-year-old boy, dreams of retiring at the age of 55 and moving abroad. Now, instead of making a lumpsum investment for his goal, he broke down his annual mutual fund investment into monthly SIPs.

GoalLive a peaceful retired life abroad
Goal valueRs 3,00,00,000
Annual investment amountRs 60,000
Monthly SIP amount (60,000/12)Rs 5000
Investment tenure35 years
Total investment amountRs 21 lakh
Assumed return rate12%
Estimated returnsRs 3,03,76,345
Total investment value at maturity
Rs 3,24,76,345

Note: The above table is for illustration purposes only.

As you can see, SIPs may help you build wealth for your goals with ease and convenience. Thus, if you are in your early 20s, you can make a mutual fund investment through SIPs to use your money prudently. Out of the many mutual fund schemes, you can opt for Equity-Linked Savings Schemes (ELSS). ELSS is an equity-oriented mutual fund; while equities may have high risks, they have the potential to deliver high returns in the long run. Moreover, ELSS can also help you reduce your taxable income by up to Rs 1.5 lakh annually if you opt for the old tax regime.

If you want to know more about mutual funds and how they work, you can read this article: https://www.edelweissmf.com/investor-insights/mutual-fund-investment-tips-and-articles/what-are-mutual-funds

This answer should not be considered as ‘investment advice’. Kindly consult your financial/tax advisors to determine the financial implications with respect to investing in Mutual Funds. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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