There are about 50 Mutual Fund Companies in India offering 100s of fund options to choose from. For any novice to start off with his investment that looks like a framework for long term investment, it is important to understand the various elements of the Mutual Funds as well the risk taking capability of an individual for making an investment. Here are 10 Strategies to use while selecting a Mutual Fund for yourself.
#1: Define Your Financial Goal
Whenever deciding upon a portfolio, it is very important to start with the end result in mind. When you define the end result and start the journey, it gives more clarity on how you should be investing smartly. Start small, start smartly. You should ask yourself these questions when deciding upon the end goal?
- What is your current Financial Position? How much are you left with from your salary after deducting your monthly expenses?
- What is your Earning Goal in the long run?
- What are your Short Term and Long Term Financial Goals? (Rs. 10,00,000/- in 5 years, Rs. 2,00,000/- in one year)
- What are your liabilities - Bills, Loans, Payments
- What are your Emergency Goals? - Medical Treatments, College Fees.
Defining these goals with a clear picture in mind lets you know how much can you spare out of your current income. Generally, out of your savings, you must try to invest 60%-70% of the income for investment purpose.
#2: Define your Risk Profile
Your risk taking capability is inverse of your age. The lower the age, the higher the risk taking capability. While you do not want to go overboard on this, a calculated risk taking profile will help you to direct your financial path towards your goals. Due to all the market variations, you might not be able to achieve 100% of your portfolio goals. But, as a thumb rule, you should aim for achieving about 90% of your portfolio goals and offset for the remaining 10% while choosing your funds.
#3. Define the Source of Payments
Defining clearly how you are planning to consolidate your source of funds at one place will help you define and separate your dividend from the principal amount. There is a reason behind doing this. the idea is to keep the principal intact and only use the dividends over time, so that you rotate the principal amount only over time.
The amount you invested as principal is working to generate the dividends for you which pays you for your necessities over time. If you can develop a clear idea of this principle, you already know the working power of money over time.
#4. Check your Tax Liabilities
Understanding the tax liabilities applicable on your portfolio is a critical factor to your savings. The best part about MFs is the power to earn tax rebated funds that can be reinvested in future without any further tax implications. That allows you a 100% compounding power, if you can chalk out a proper strategy.
#5. Factor the Inflation
Most of the investors do not factor the implications of inflation in the market which is a very important factor to your investment in valuation of your assets. The inflation figures are MOM (Month-On-Month) factors and that can impact your investment over the year end, if you do not keep that in a measure. You can check the present month inflation rate here.
#6. Check the Fund's Investment Strategy
The investment strategy of the MF will decide eventually the returns that have been shown while you are in the decision making process of purchasing a fund.
Remember, merely because a fund has performed well in the past does not mean it is going to do so in the future also. It depends upon the overall performance of all the major sectors of a Mutual Fund in which the fund house is making an investment.
As a thumb rule, if the performance of 70% -75% of the total sectors is giving a positive trend, then it is a good idea to decide buying a fund.
#7. Check the Fund's Periodic Performance
You cannot just invest your hard earned money and expect others to manage it. If they would have been better than you, they wouldn't have been where they are right now! And that's the universal truth about Fund Managers.
Remember the tiny disclaimer you see when you buy out a mutual fund, especially Equity related schemes, which clearly mentions that the MF investments come with market risks. Which means, your fund manager is in no way impacted if your investment fails miserably due to his blunders, and usually, he is more interested in claiming his percentage through your MF investments.
It is a good idea to regularly monitor the performance of your funds. In the forthcoming posts, we shall see how you can do that on a regular basis, even when you are someone who is on a full time job and get limited time to monitor your funds.
#8. Decide the Percentage Investment
The best part about the MF investment is that you can decide an investment strategy, split it up into Short Term and Long Term investments and then invest in them accordingly. As a thumb rule, it is a good idea to start off with minimum SIP of Rs. 10000/- which should be then spread over 3-4 funds depending upon your investment goals.
#9. Keep a Buffer
We all sit for examinations throughout our lives. We seldom score a perfect 100%. The same principle applies to MFs too, or for that matter, everything in life. So, it is essential to keep a buffer in your investments. Let's say, that the fund you chose is showing an expected return of 15%.
Keeping a buffer of 20%, on the total performance, we get a value as (15% x 0.80) = 12%. This means that we take an imaginary buffer line of 12% which acts as the red line for the fund. If the fund is performing consistently below that line, it is time to do away with it, without any sentiments. Any further holding of the funds will only be hurting your portfolio on the time value. We will understand how the time value of money works in later posts,
#10. Plan a Good Exit
Last but not the least, most investors are confused about the concept of Entry and Exit Loads on MFs. Before pressing that final 'Buy' button, you must check the entry and exit loads on the funds which will impact the fund redemption drastically.Typically, the Entry Load on almost all type of MFs have been wavered, but there could be 1% exit load 'depending upon how you exit', the fund. We shall see in further posts how you can benefit on the Equity Fund MFs by saving the Exit loads.
For any MF investment related questions, you can Whatsapp only to +91-8585994969
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