My brother recently got his first annual appraisal and I was caught off guard when he told me that he wants to invest his extra savings in mutual funds. Frankly, I was expecting him to use that money to visit Goa or any other off-beat location cause that’s what I did when I got mine.
I’ll admit I’m not very fond of investing because of the risks it curtails, but when he showed me the possibilities and benefits, I reconsidered. I have started investing now and would like to share some things I learned along the way and that I think are crucial before investing.
Being possessive about my money, I’m hell-bent on trying to save as much as I can and keep a tab on my savings account. Seeing that number grow whenever money goes into my account gives me a high.
But the savings account gives between 2.5% - 3.5% interest rate and seeing the inflation rates ballooning, I’m sure I won’t have enough to survive in the long run if I continue this trend.
This is where investing can help. By putting my money into asset classes that have the potential to grow faster over time, I stand a chance to receive returns that are higher than what my bank account gives me and stay ahead of inflation. The thing is, with investing, you give your money a chance to grow, in turn creating wealth, which is the purpose of investing.
After dabbling in all possible investment avenues, I decided to invest in mutual funds and here’s what I learned.
I decided early on to invest in mutual funds, so I saved a lot of time choosing which asset class to invest in. But irrespective of the asset classes available, all of them will work only if you know what you want out of them. In other words, have a goal to achieve when you invest.
How would you feel if you sat in a car without knowing where to go? Investing is the same. Setting up an investment objective helps keep you on track.
And there are different types of mutual funds for different goals. I invest in having enough when I retire. So I choose passive funds that will only show returns over a long period of time. Similarly, others will have different goals, for instance, studying abroad, buying a house or for the future of their children, the list is endless.
A quick check is to ensure your goal follows the SMART matrix - Specific, Measurable, Achievable, Realistic, and Time-bound.
Though investing has the potential to generate high returns over a period of time, it comes with certain risks. They are two sides of the same coin. So it’s essential to know how much risk you’re willing to take with your investments.
A good way to check is by getting your risk profiling done online. This gives you clarity on the type of investor you are. Based on that, there are three types of mutual funds
These funds carry minimal risk and provide more or less stable returns. Investments are primarily restricted to real estate, government securities and other debt instruments that stay ahead of inflation.
These funds have slightly higher exposure to equity funds, which increases the risk, but the returns are also better than low-risk funds.
Suitable for those who like taking risks and can bear the brunt of losses in their investment. However, the returns are also very high. It is advised to regularly review the performance of these funds since they are highly susceptible to market volatility.
In investing, especially in mutual funds, you’ll definitely hear, “more the risk, more the return”. In this case, risk pertains to the possibility of losing capital or swings and fluctuations in investment value.
While evaluating mutual fund schemes, it’s obvious to see the returns you will get on your investment, but it’s equally if not more important to see the risk associated with that particular fund. While equity funds are the riskiest ones, liquid funds are the safest investments but still do contain some risk, although not as much as equity.
Remember, just investing in equity will not guarantee you higher returns. As per my profile, I am a medium risk-taker, so I choose to invest in index funds (a passive fund that looks to replicate returns similar to indices like Sensex or Nifty). So, while choosing the funds to invest in, make sure you consider the risks involved as each type of mutual fund has different risks associated with them.
Apart from various mutual funds available, you also have a choice whether you want to invest a fixed amount once or systematically over a period of time.
SIPs or Systematic Investment Plans allow you to invest regularly in a mutual fund scheme which can be done daily, weekly, monthly or half yearly, depending on your preference. On the other hand, lump-sum is a one-time bulk investment. Below is a brief comparison of the two
Another benefit of opting for SIPs is that it inculcates a sense of saving as a fixed amount goes into your investments and banks also offer to set up automatic investment instructions per your convenience. You can set it up and forget about it.
Had I known about this earlier, I would have begun at the time because who doesn’t want to grow their money, right?