What are the top Do's and Don'ts in Mutual Fund Investing?

Mutual funds in India are one of the most convenient, well-regulated, and easy investment options. Mutual fund investments have gained popularity due to their unique features and advantages such as professional management, diversification at a lesser cost, suitability for every type of investor, and potential to deliver higher returns, etc. With all these distinct features, mutual funds have become the preferred investment option for first-time investors. However, like any other investment option mutual fund investing also has some do’s and don’ts to be effective and successful. Let’s take a look at do’s and don’ts of mutual fund investment.

Do’s

1. Assess your risk before you invest

Before you invest in mutual funds in India, it is important to understand your risk appetite. As mutual funds are market-linked investment products, the degree of risk varies for each type of mutual fund depending on the underlying assets or securities. Before you invest, assess your risk-taking ability depending on your age, income, and other parameters and also by taking a risk assessment questionnaire. Understanding your risk profile helps you make the right fund choice.

1. Know your asset allocation

Once you understand your risk profile, the next step is to know your asset allocation based on the risk-taking ability, financial goals, and time horizon left to achieve them. You can choose to allocate your money in varying proportions in asset classes or fund types like equity funds, debt funds, exchange-traded funds (ETFs) and ELSS, etc. Choose the best mutual funds to invest in with the right asset allocation based on your need.

1. Be aware of tax implications

For an investment success, the tax efficiency of that investment plays an important role. Tax implications of mutual funds in India vary depending on the type of funds you choose. Equity funds are taxed differently than debt funds. There are also ELSS funds that allow you to claim tax benefits under Section 80C of the Income Tax Act. Tax efficiency is an important consideration to get good post-tax returns on your investment.

1. Choose investment method carefully

A mutual fund is a flexible investment option that allows you to invest both in a lump sum method or through a systematic investment option. If you are an investor looking to save a small portion of your income at regular intervals with a long-term perspective, SIP is one of the best options. If you have a surplus corpus to invest in, you can choose to go for lumpsum investment. Choose the best mutual fund to invest in through the method that is perfectly suitable for you.

1. Regularly review and monitor your investments

Mutual fund India requires you to keep an eye on it on a regular basis so that you can quickly act upon it if there is a switch or change of assets or funds required. Review on a regular basis and constant monitoring of mutual fund investment are important to reaching your desired goal.

1. Seek financial advisor’s help

Though mutual funds are professionally managed, it’s highly challenging to choose the right fund among the vast variety of funds available. With the help of a financial advisor, you can work out a financial plan considering the entire financial picture and then choose the best mutual funds to invest in accordingly.

Don’ts

1. Don’t panic sell/redeem

Take a goal-based approach to mutual fund investments instead of taking a market-based approach. Do not make any irrational decision of redeeming your fund units based on short-term market volatility.

1. Don’t invest all your money in one asset or fund type

Diversify your investments instead of putting all eggs in one basket. Diversification helps you reduce risk and maximize return potential.

1. Don’t invest without expert advice

Investing without expert advice can cost you over the long term. An advisor can guide you with a holistic approach.

1. Don’t invest without reading the fund’s fact sheet

It is important to read the fact sheet that contains details of fees, past performance and also can help you assess fund risk. Hence, do not rush to sign without reading the fact sheet.

Keeping in mind the do’s and don’ts can help you choose the best mutual funds to invest in based on your financial goals and risk profile.

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