Investing in mutual funds has gained popularity over time. With digital marketing reaching the next level, there is rarely a chance of an individual spared from the ‘Mutual Fund Sahi Hai’ campaign. And to everyone’s benefit, these campaigns have been highly productive with people flocking in to buy mutual funds, extensively and as the primary option for a secondary income.
While the hype has persisted and so has the enthusiasm for investing in mutual funds, there are a lot of determinants that influence the health and performance of your mutual fund portfolio. At times, cognitive biases and peer pressure rule the investment decision for a lot of people which is not just bad but also deteriorating.
It will not only be unhealthy for your portfolio but will also raise a conflict in your type of investments and your ultimate life goals. Hence, it is very important that you diligently select the funds and build your portfolio as per your life and financial goals.
In this article
Core and satellite approach to investing
After several experiments and researches conducted on investment behavior and style of people, experts have come up with an excellent approach to investing which suits almost everyone. The core and satellite approach of investing talks about a core investment which is the major investment you make in life according to your life goals and the satellite investments are the ones which network round the core investments helping realize the goals.
Here are the key factors you must consider before picking up mutual funds and building your portfolio;
- Your life and investment goals
- Your investment style
- Portfolio diversification
- Choice of funds
- Basic understanding of the market
Your life and investment goals
The first thing which you must consider while building up your investment portfolio is your life goal. Life goals are the overall goals which you expect and set for your life and include financial goals as well. Financial and investment goals form a major part of the life goals setting as most things we desire are related to money directly or indirectly. For example, buying the latest SUV is a direct monetary expectation and a desire to do a destination wedding fulfilling all your child’s desires which include indirect monetary expectations.
Before you start investing, ask yourself “Why am I investing?”, “What is the purpose of this investment?”. These questions will not only bring clarity to your investment style but will also help you build up a strategy in alignment with your life goals. Even if you are not able to give a precise answer to these questions, having a ballpark figure or a rough estimate of expectations will serve the purpose. Your goals will also vary as per your age.
For example, if you are a young investor, one of your investment goals would be tax saving, hence ELSS funds would be the best option for you. if you are an older investor, you would want to preserve your money and save for retirement hence NPS option or investing in long-term debt and related securities would be the best option for you. depending on demographic factors and goals, you must decide your core investment and choose the satellite investments based on former.
Your investment style
Investment style primarily refers to whether you are an aggressive or passive investor. If you are a passive investor, your focus mainly would be on capital preservation and generating a substantial corpus by the time you retire. There can be several other goals you might be investing for. Meanwhile, you focus on your goals, there is one very crucial driving factor when it comes to selecting the instruments, your risk profile.
In the race of chasing returns, people tend to forget that more than returns, risk matters. When you push your money in the stock market, you are inviting some risk to your money. Although there are a lot of ways which help you cushion against the systematic risk prevalent in the market, still nothing can guarantee a risk-free investment. Hence, while you are taking investment-related decisions, you must consider your risk profile and invest accordingly. If you have a low-risk appetite, you will be a passive investor and if you have a high-risk appetite, you will be an aggressive investor.
The next big thing after mutual fund investments is the portfolio diversification. While people confuse it with loading your investment portfolio with investments, it essentially means spreading your investments across different sectors and industries so as to make the best out of all cyclic phases the stock market runs through.
Portfolio diversification is a very critical matter and must be dealt with very carefully. Do not over-diversify your portfolio as it will destroy the essence of diversification and also may prove harmful due to mismanagement among a huge number of funds.
Choice of funds
The positive impact of mutual funds flourishing as an investment option is not only a matter of relativity to the investor side but also to the business side. With the growing inclination towards mutual funds, a lot of companies are coming up with New Fund Offers and several other schemes. While these may prove to be highly rewarding, there is always a flipside. The probability of an NFO going up or down is both 50%-50%. NFO does not have a proven track record and hence cannot be researched for its history of dividend pay-out. If you are new to the investment market, you must stick to the basics of debt, equity ad hybrid funds of established companies and may later experiment with the new schemes once you get the hang of it.
Basic understanding of the market.
When you start anything new, you must have a basic understanding of that product or business or service. Same goes with mutual fund investments; before you actually jump in, it is desired that you must have a basic understanding of the market and its ways. Do not start with the intention of making fast money, fast money generally goes out faster. Stick to the ground rules and follow them in a disciplined way. There are two modes of investment through which you may enter the market, SIP or lumpsum. Understand your money requirements and make the decision accordingly. SIP is the best and safest way to start investing.
To Sum Up
Once you have considered all these factors, you are ready to build a portfolio meeting your choices and realities. While being invested, educate yourself about the market and industry. If you find it confusing or difficult at any stage, consider taking expert help but refrain from making decisions based on impulses.