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Tips to invest in mutual funds for beginners

Mutual funds emerge to be a popular form of investment for beginners who want to increase their finances over a period of time. The main reason for its popularity is its flexibility. The best platform to invest in mutual funds is online as you can invest for a small sum of money for an infinite period. Still mutual funds could pose to be a daunting risk for individuals due to the perceived levels of risk.

Investors are of the notion that investing in any mutual fund is the same, but it does not work that way. They are divided into categories and further sub categories for an investor to invest. The funds are not dependent on any investment horizon, but differ on the basis is asset class and even exposure levels. Because of the diversification of choices you might feel overwhelmed and find it difficult to distinguish among the various choices. Before you are planning to make a foray into mutual funds there are some pointers you need to consider

Figure out the type of risks involved

For your investment opportunities you need to clearly outline the risks involved. Be it any type of mutual fund there is a certain level of risk involved due to the underlying securities or even the investment methodology. The equity funds have the highest level of risk though they provide you with the highest levels of return. On the other hand debt funds have low risk and for this reason the returns on investment are on the lower side. Hybrid funds adopt a balanced approach as far as investment is concerned.

It is important that you clearly figure out the risks or return relationships in relation to each of the funds and in the choice of a mutual fund it needs to meet your levels of expectations.

Have your investment objectives clear

Once the risk is figured out there are a couple of questions you need to ask. They are what the amount you are planning to invest is and what duration of time you can remain invested. Mutual funds provide a lucrative option as you can start off even with a small amount. In addition apart from certain mutual fund schemes like ELSS you can redeem your funds at any point of time. This works out to be the main objective of a mutual fund goal calculator. If you are planning to invest for a short point of time then liquid funds would be a worthy option

NAV does not have any significance

The NAV associated with a mutual fund does not have any significance on how a fund is performing over a period of time. For this reason the mutual fund figures are represented by percentage figures. Once you have gone on to purchase a fund with a high NAV or low NAV the investments as a percentage would have an impact only when the performance of a fund is considered.

Diversification over a period of time

Mutual funds provide an ideal opportunity to diversify your investment over a period of time. This is based on the level of investments that you end up making over a period of time. For example if you feel that the market is bullish and you want to make money at a fast pace then opt for investments with high risk. The same policy applies if you do not want to take risk and then opt for a significantly lower investment tool. A general saying is that you need to diversify your portfolio with a mix of equity and debt instruments as this can help to balance the overall levels of risk in terms of your portfolio.

Mutual funds needs to be invested for a long period of time

For some investors mutual funds might seem to be an option to make some quick money. But seldom had this works that way as you need to stay invested for a longer time horizon in order to reap the rewards. Ideally you should stay invested for a period of 5 years or more, the reason being that the equity markets are really hostile. If a long term horizon is adopted then the equity markets would always head to the upward direction.

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