KNOWLEDGE CENTRE Mutual Fund Basics / 7 Things You Should Know Before Investing In Mutual Funds

7 Things You Should Know Before Investing In Mutual Funds

Determining how much you need to invest today to be able to fulfill a future requirement requires you to estimate the performance of several variables that are beyond your control.

Well, this is what investment plans are all about. The principal task of investments is to create wealth and grow it over a period of time. All the events in your life have a financial value attached to them. Therefore, you need to accumulate the required amount before you are able to meet your goal. To do that, you need to start investing efficiently early in your career.

Research and compare all available investment options and then based on the analysis report, choose the one that best fulfills your requirements. However, there are a few things that you should know and have in place before you start creating an investment plan.

How to make a proper financial plan?

The prerequisite to an investment is a financial plan. This will detail your current income and the expenses including your tax payments. Based on the same, you will be able to invest a predetermined amount without facing any financial difficulties.

It would also account for an increase in earnings, thereby enhancing your saving capability. Similarly, a financial plan considers an increase in your expenses, thereby decreasing your saving capability. These will determine the amount you have available for investing towards your life events.

Depending on the importance of an event and the time available for it, you may assign an investment instrument and the amount to the same. Ensure you have a different investment for each financial goal.

How to plan ahead for contingencies?

When putting together your financial plan, make sure that you maintain enough liquidity to meet contingencies, as they are unavoidable. For example, there is no guarantee that you or your family member may not meet with any unforeseen circumstance. To account for such emergencies, you may opt for a health insurance.

In the same way, life insurance for the right amount of coverage must also be a part of your financial plan. You may choose to buy term life insurance wherein the premium amount is less, and coverage is more. This will allow you to allocate money in other more lucrative investment options.

How to factor in the cyclical nature of the market?

Prevailing market conditions affect all investment instruments, and thus you need to be mindful of the same. It has historically been seen that market corrections leading to low earnings are followed by improvements that enable higher earnings. However, the tenure of such cyclical movements is extremely difficult to predict.

Why should you avoid timing the market?

It has been observed that remaining invested in the market for a longer period is always better than trying to time the market. Since the market’s performance is cyclical, it is very easy to get tempted to time the market. But it is extremely difficult and risky to predict the market. This is precisely why it is better to spend time in the market by remaining invested for longer periods and profiting from the overall growth than to increase the risk exponentially by trying to time the market.

Making an informed decision and not letting your emotions affect you

When it comes to finances, you must always listen to your brains and leave your emotions out. Always research and analyze the performance and returns, and then based on the findings, make an informed investment decision. You may also take advice from a professional financial consultant to understand the market better.

Investing for the long-term in share market

In the short-term, an instrument might not perform up to the expectations, but you should give it a reasonable time and then compare its performance to the overall market performance. If it is at par or better than the market performance, then there is nothing to panic.

If it is marginally underperforming than the market, you need to watch it closely and determine if it is time to exit or switch. Bear in mind though that the long run winner is a slow but steady runner, and that the sprinter covers a very short distance.

Considering the effect of other factors on your investments

There are controllable and uncontrollable factors. Factors such as the amount to invest and investment tenure are under your control, whereas interest rates, gross domestic product (GDP), and market performance are factors beyond your control. It is important to understand these to compare mutual funds and other investment products.

Thus, when charting your financial plan, ensure you choose investments based on the amount and tenure. You should not invest in an instrument just because it is currently performing well or is expected to do so.

Angel BEE allows you to compare mutual funds and provides you with a detailed analysis of the available investment instruments in a simple and comprehensible manner with suggestions that are free of human bias. This will help you make informed decisions on choosing the right investment products.


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