In a world where financial choices can sometimes feel complex, the journey to financial prosperity often begins with a simple yet powerful question: How can my money work for me?
Investing, the art of putting your hard-earned cash to work to generate more wealth, is a key answer to that question.
However, for beginners, the landscape of investments might seem like a dense forest filled with confusing options. While you can make money using trading platforms for forex, investments is where mutual funds come in!
Mutual funds are like a team of financial experts who pool money from various investors to create a diversified portfolio of stocks, bonds, and other securities.
What exactly does that mean for you? You get to ride the waves of the financial market without having to navigate the choppy waters alone.
In this beginner’s guide, we’ll look through the basics of mutual funds and how they can help turn your financial aspirations into reality.
Table of Contents
Types of Mutual Funds
Based on their investment objectives, mutual funds can be classified into different types. Here are some of them.
Debt funds invest in fixed-income securities like bonds, debentures, government securities, corporate papers, and money market instruments. Your aim will be to provide a regular income and preserve capital.
Though the returns of debt funds are lower, the volatility and risk are also reduced, making them a good choice for investors with a low- to moderate-risk appetite and a short- to medium-term horizon.
Hybrid funds seek to balance growth and income and, therefore, invest in a mix of equity and debt securities.
They produce moderate returns with lower volatility and risk than pure equity funds but higher than pure debt funds. Hybrid funds also carry moderate risks and can either yield profit on a medium- or long-term basis.
Why Should You Invest in Mutual Funds?
Diversification
By investing in a mutual fund, you can own a slice of many different companies or sectors. This reduces your risk and exposure to any single one.
It also increases your chances of capturing the returns of the market as a whole, rather than relying on a few individual stocks.
Professional management
Mutual funds are managed by experts who have the knowledge, experience, and resources to research and select the best securities for the fund’s objectives.
Apart from that, they also monitor the performance and adjust the portfolio accordingly to meet changing market conditions and investor expectations.
Liquidity
You can buy or sell mutual fund units at any time, based on the fund’s net asset value (NAV), which is the market value of the fund’s assets minus its liabilities.
This means you can easily access your money when you need it without having to worry about finding a buyer or seller for your securities.
Convenience
Investing in mutual funds is easy and hassle-free. You can choose from several funds that suit your goals, risk tolerance, and time horizon.
Even better, you can automate your investments through systematic investment plans (SIPs), which allow you to invest a fixed amount at regular intervals.
Investing in mutual funds is simple and straightforward. As a beginner, the stops we provided below will help you get started with mutual funds.
Open an account.
First off, you need to open a mutual fund account with a fund house or an intermediary, such as a broker, distributor, or online platform.
During registration, you’ll be required to provide your personal details, such as your name, address, and bank account.
Select a fund.
After opening an account, you have to select a mutual fund that matches your investment objective, risk profile, and time horizon.
In selecting a fund, consider factors like the fund’s performance, risk-return ratio, benchmark, portfolio, expense ratio, and fund manager before making your choice.
Online tools like fund ratings, rankings, calculators, and comparison charts can be handy in helping you make a decision.
Make a purchase.
There are different ways to make a purchase. You may fill out an application form and submit it along with your payment to the fund house or the intermediary.
Alternatively, you can make your purchase online through the fund house’s website or app or through a third-party platform. The number of units you will receive depends on the net asset value of the fund on the day of your purchase.
Monitor your portfolio.
You need to keep track of your mutual fund portfolio and review it periodically to see how it is performing and whether it is meeting your expectations and goals.
Mobile apps and regular statements and reports from the fund house or the intermediary will let you access your portfolio online. You can also use online tools, such as portfolio trackers, alerts, and analytics, to help you with your monitoring.
Tips and best practices for investing in mutual funds
Diversify across different types, sectors, and styles.
When investing, you should not put all your eggs in one basket. Instead, spread your investments across different types of mutual funds, such as equity, debt, and hybrid. Also consider different sectors and styles, like large-cap, mid-cap, thematic, sectoral, value, etc.
This will help you reduce your risk and optimize your returns, as different funds may perform differently in different market conditions and cycles.
Invest regularly
Invest in mutual funds through systematic investment plans (SIPs), which allow you to invest a fixed amount at regular intervals, such as monthly, quarterly, or annually. SIPs help you benefit from the power of compounding as your money grows over time with the returns of the fund.
Reinvest dividends
You should opt for the growth option rather than the dividend option when investing in mutual funds.
The growth option reinvests the dividends declared by the fund back into the fund, which increases the NAV and the number of units you own. But the dividend option pays out the dividends to you, which reduces the NAV and the number of units you own.
Review your portfolio periodically.
Always review your mutual fund portfolio periodically, such as once every six months or a year, to see how it is performing and whether it is meeting your expectations and goals.
Conclusion
Mutual funds are a great way to harness the power of the stock market and achieve your financial goals. They offer many benefits, such as diversification, professional management, and liquidity.
However, it’s important that you do your research and verification before investing and consult a financial advisor or planner for guidance and advice.
