5 Things to Know Before Starting Your Mutual Fund Investment

Investing in mutual funds attracts most investors because it has the potential to generate high returns in the long term. While some investors prefer it out of sheer simplicity, others think it can help them beat inflation. But, there are still some who are trying to figure out if mutual funds are the best bet for them. Although they do carry some market risks, investors can maximize the potential for returns with the right knowledge and guidance. 

Here are five things you should know if you are about to invest in mutual funds for the first time: 

Why Choose Mutual Funds

If you are earning a good and steady income from traditional investments, there is nothing wrong with it. However, if you aim to achieve higher returns, then you should increase your risk-taking capability. Mutual funds can be considered as a basket of investments with one single mutual fund investing in multiple shares and/or bonds. It allows you to increase the potential for better returns in the long run. It also helps in minimizing the risks as you diversify your portfolio. 

Choose the Funds Wisely

If you are aware of your financial goals, you can select the mutual funds that best suit your needs. Investors usually focus on maximizing returns and forget that there are risks attached to these funds. You need to consider risk-adjusted returns, especially when you choose to invest in equity funds that are more vulnerable to market fluctuations. If you are careful of the fund’s performance history, the expertise of the fund manager, associated tax benefits, etc., you can select a fund that will have the potential of optimal returns over the long-term. 

SIP or Lump-Sum – The Better Bet

Lump-sum refers to a one-time investment that is ideal for investors with a substantial disposable amount in hand. SIP or Systematic Investment Plan, on the other hand, requires an investor to place a fixed amount in the scheme every month. While a lump-sum investment allows you to place your bet early on for potentially higher returns, it also requires a higher risk tolerance. SIPs are more suited to investors who are new to the market and wish to develop an investment discipline. 

Invest Directly or Through An Agent

Mutual funds have the potential to generate high returns but they carry the market risks as well. As an investor, you need to have substantial knowledge of the market trends to reduce these risks or hire someone like a fund manager who does. If you are new to investing, you can either seek the help of a trusted agent to create a diversified portfolio or choose a SIP to invest directly. 

Create an Ideal Portfolio

Your portfolio determines the potential returns on your investment in the long-run. As a new investor, you should consult with your financial advisor regarding investment factors such as risk appetite, investment horizon, and financial goals. It will help you in creating a customized portfolio with minimum risks. 

If you learn about the basics and understand the risks before you start investing, you can potentially generate higher returns over time. So, start a SIP, invest in equity funds, or create a mixed portfolio. As long as you have the right knowledge and guidance, you can make the most out of your investments.