5 Investing Mantras for Mutual Fund Investors
Mutual funds are steadily emerging as one of the most preferred investment products amongst the retail investors for the benefits they bring on the table, including professional fund management at lower costs, diversification, preferential taxation rates for equity funds, etc. However, it is crucial to stay committed to the investment philosophy at all times.
Here are five investing mantras for new mutual fund investors must follow
Have a Plan
One should always plan for his/ her financial goals well in advance and start investing towards such goals in a systematic manner. One should list down his/ her financial goals clearly and then decide the investing strategy to achieve those goals in a time-bound manner. Linking the investments to financial goals may also be instrumental for the investors to ignore the short-term market volatility, and instead focus on the long-term market outlook.
Further, it is always advisable to start early towards investing. As one starts investing at an early stage, the investments may generate significant returns over time due to the benefit of compounding. Compounding refers to the additional returns generated by the portfolio due to the reinvestment of earlier returns into the portfolio. This helps the investors to generate higher returns in the long run.
One must stay disciplined in their investing journey since the achievement of financial goals in a time-bound manner calls for sincere commitment from the investor. Considering the volatile movements in markets, the emotional biases, especially fear and greed, tend to delay the investing plans.
One may register a Systematic Investment Plan (SIP) to make regular investments in a pre-specified mutual fund scheme at periodic intervals. Such investing across the market ups and downs allows the investors to inculcate a sense of financial discipline into their lives.
Different asset classes may react differently to even similar macroeconomic events. For example, a fiscal stimulus to the economy may be a booster to equity markets. At the same time, it may be a dampener for the debt markets as higher borrowings by the Govt. may lead to higher yields in the markets and thus lower valuations for debt securities.
As such, having a mixed portfolio containing different asset classes may negate the adverse cycles in one asset class with favourable returns in the other asset classes. It is, therefore, advised to spread the investment portfolio spread across different asset classes.
Further, the investment portfolio must also be aligned with the risk profile of the investor. One may choose to balance the portfolio risk by selecting an optimal asset allocation within the investment portfolio. An advisable asset allocation strategy for the investors is to have a non-equity allocation in the portfolio equal to one’s age. For example, a 25-year young investor should ideally invest 75% in equities and rest in other asset classes like debt, gold, etc.
Just like it is important to invest, it is equally crucial to review the investment portfolio regularly. Such a portfolio review helps the investors to identify the underperforming mutual fund schemes and take timely action to replace such schemes with better performing schemes.
However, the investors must also note that the review of portfolio schemes must be made based on their performance on a long-term basis, and short term volatile movements, whether favourable or adverse, may be ignored to compare amongst other schemes. A portfolio review may also enable the investors to align the mutual fund portfolio with the changes in the financial goals, surplus cash flows, etc.
Building an Emergency Fund Corpus
It is advised to maintain an emergency fund corpus equivalent to at least six months’ expenses. Such emergency fund may lend financial cushion during the times of emergencies, thereby leading to lower mental stress on already straining situations. Such a corpus need not be created in one go but may be funded over a period.
For example, one may consider creating such funds over 12-18 months. Such funds may be invested into liquid funds instead of parking the same in savings bank accounts, for the potential of better returns while maintaining reasonable liquidity for the funds.
As one starts his/her investment journey into mutual funds, it is paramount to stay committed to financial goals.