If you are someone who wants to secure their future financially, then you need to start investing through effective financial planning. Financial planning is nothing but having a defined set of short-term and long-term financial goals so that you get a clear direction on how to pursue these goals through savings and investments. Mutual funds are becoming a favorite investment tool for a lot of investors here in India.
What are mutual funds?
Mutual funds are a pool of professionally managed funds where the fund manager buys and sells securities in accordance with meeting the scheme’s investment objective. What mutual funds do is that they collect money from investors sharing a common investment purpose and invest this pool of funds in stocks and other money market instruments like government securities, call money, treasury bills, commercial papers, corporate bonds etc. The performance of a mutual fund solely depends on the performance of its underlying assets and the sectors in which they invest. Mutual fund holders receive shares in the form of units in proportion to the money they invest and depending on the fund’s existing net asset value (NAV).
Investing in mutual funds
Usually there are two options for investing in mutual funds. You can either invest in these funds by making a lumpsum investment or you can start a Systematic Investment Plan (SIP).
Lumpsum: If you have surplus cash parked which is just sitting ideal and feel that it can be put to better use, you can make a lumpsum investment in mutual funds. When you make a lumpsum investment in mutual funds, you invest at the beginning of the investment cycle. Another good thing about lumpsum investment is that mutual fund holders are allotted more number of units in proportion to the investment amount and depending on the fund’s existing NAV.
Systematic Investment Plan: If you are someone who wishes to give their investments a systematic approach then you can consider investing in mutual funds via SIP. Systematic Investment Plan or SIP is an easy and hassle-free investment approach towards mutual funds where all an investor needs to do is inform their bank and every month a fixed amount is debited from their savings account and transferred to the mutual fund.
If you are considering investing in mutual funds via SIP, here are few common mistakes to avoid:
- Invest for short term
SIP is usually ideal for those who have a long investment horizon. You can start with a small amount and gradually increase the monthly SIP as per your investment objective. However, it is advisable for an individual to remain invested in mutual funds via SIP for a long term so that they can benefit from compounding. If you have a short term financial goal, then it is better you make a lumpsum investment because SIP isn’t going to fetch you any decent gains.
- Do not invest in multiple mutual funds
Investing in multiple mutual funds via SIP might not be a good idea because you will have to keep a track on all the SIPs at regular intervals. This can become a task in itself and hence avoid starting multiple mutual fund SIPs.
- Stop investing when market is down
Remember that when the markets are low, it is actually an opportunity to buy more units at a low NAV. Do not bail out on your SIPs during such times and continue investing systematically to fetch better capital gains.
- Start a SIP in a high performing fund
Avoid the mistake of investing in a top performing fund. Just because a fund has given good returns in the past one or two years that doesn’t necessarily mean that it will replicate the same in future as well. Rather invest in a fund that has given consistent returns in the past five to seven years than investing in a high performing fund.
- Invest without researching
It would be immature if you start a mutual fund SIP without doing adequate research about the fund. It is better to check basic things like the CRISIL ranking, the performance of the fund as compared to its peers, whether the fund has outperformed its benchmark in the past, etc. before investing.
- Investing in a fund with a high expense ratio
If you start an SIP in a mutual fund that has a high expense ratio it might affect your long term capital gains. Hence, watch out for the expense ratio while investing in mutual funds.
We hope that you avoid the above mistakes when investing in mutual funds via SIP.