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Are you new to the investing world? You are probably too overwhelmed with different types of investments available to you. With so many dos and don’ts for investing in mutual funds, it’s easy to feel bombarded. While the internet is filled with guides on how to invest in mutual funds and why to invest in mutual funds, in the first place, here are four questions you, as a newbie to investing must be asking.
- What should I expect when I invest in mutual funds?
All types of investment are exposed to a particular degree of risk, and mutual funds are no exceptions. Mutual fund investments can be easily impacted by several parameters such as consumer sentiments, political events, earnings, natural disasters, pandemics – such as now. Historically, equity-based investments and stocks have constantly enjoyed the highest potential of generating significantly higher returns over a prolonged duration. These investments typically enjoy double-digit average returns per annum. Then comes the fixed-securities, money market instruments, and cash and cash-equivalents with a lower potential of generating high returns. The premise is that with every higher level of risk, the investment enjoys the potential of higher level of returns.
- What is risk appetite? And how do I evaluate mine?
Risk appetite basically comes down to the level of risk you are willing to afford in pursuit of higher returns on your investments. As a thumb rule, if you are experiencing sleepless nights where you are concerned about the downfall in your investments, you might be undertaking more risks than you can afford. On the contrary, if you are worried that you might not be tapping into good earning opportunities to make profits, then you might be too conservative with your investments. It is important to establish the right balance and determine your risk profile. You can take help from a financial advisor who can provide you more insights and help you quantify your risk profile.
- Is there any way to minimize risk?
One of the best ways to curtail risk is by ensuring that your mutual fund investments are well diversified across different sectors, asset classes, and location. Diversification helps to spread and reduce risk across your investments. The basic idea behind diversification is to build a portfolio that will offset the losses occurring from any one type of investment. However, ensure that you do not over diversify your portfolio.
- What is the most important rule of investing in the market?
One must never invest their funds that they cannot afford to miss. Indeed, you must invest in mutual funds for the wealth generation opportunities it bargains, but do not go all in. You must not be naïve enough to invest your entire savings and emergency funds in the stock market. You must always preserve a part of your portfolio. Going all in will make you emotionally attached to your investments and it is always frowned upon to be swayed by emotions and market sentiments.
Invest in mutual funds only after carefully analysis and research. Remember, mutual funds do not work on the concept of ‘One size fit all”. So, make sure that your mutual fund investments are aligned to your financial goals, risk profile, and investment horizon. Also, if you wish to calculate mutual fund returns, you can use an investment tool known as mutual funds calculator to help you do the same. Happy investing!
