Invest depending on your risk appetite
Investing involves a variety of risks. The trick is to strike a balance between these as a suitable balance will vary for each individual and depends on one’s personal circumstances, investment goals and attitude to risk. Risk appetite is nothing but the combination of all these factors. Your attitude to risk is a dynamic factor and can change depending on your stage in life—what feels comfortable one day may not be the case next time. A good way to start assessing your risk appetite is to check the riskometer which indicates the investment risk in a fund. If it meets your risk-taking ability, go ahead and invest.
Invest regularly
Systematic investment plan, or SIP, is in practice nothing but simple ideas at play. Today, SIP has become synonymous with mutual fund investing just the way EMIs have become synonymous with loans. SIP is nothing but investing a fixed sum regularly regardless of the NAV or market conditions. At the same time, SIP helps you manage your cash flows better. Just the way you earn each month, SIP enforces the discipline to invest each month, thereby ensuring that you invest regularly and not try to time the market. Most importantly, an SIP places a check on investor behaviour of exciting investments when the markets fall by staying invested for a long period irrespective of market movements. Just the way tiny drops make an ocean, small sums invested over time create wealth.
Invest based on asset allocation
The general approach to asset allocation is to determine which asset classes to invest in based on your risk tolerance and return objectives. In its most basic form, asset allocation means distributing your money across equity, bonds and cash in a way that it provides the potential for the best investment return for the amount of risk you’re willing to accept. The second step is to monitor and maintain this asset allocation in such a way that you don’t get victimised by changing market conditions.
Invest in a portfolio for each financial goal
Setting a goal is a very personal activity. For some, it could be buying a home. For others, it could be planning a child’s education. Still, others might want to retire sooner rather than later. In any case, success comes by having and working towards a vision. Once a goal is established, success is in the details. Successful investors translate goals into reasonable timeframes and monthly target amounts for their savings.
At the same time, remember that these goals are not static and are very much subject to change. Successful investors are realistic and flexible, and revisit their goals whenever there are major life changes such as marriage, birth of a child, or purchase of a home. At the same time, investing in a portfolio specifically for a goal not only increases the commitment to invest, it invariably also results in the goal being achieved in time.
Invest by delving into details
Considering the fact that there are no guarantees when it comes to investing in mutual funds, what is the best parameter to consider before investing? This is where the performance track record of a fund comes into play and infuses confidence in investing in such funds. While past performance is no way guarantee of future returns, it is still the feasible information before investing. Just the way a selector puts faith in a cricketer who has played consistently, a fund with a proven track record and performance history makes way into portfolios of investors. A seasoned fund with track record would not only have weathered bad phases of the market, it would have equally made up with gains when the going was good.
Invest in mutual funds for automatic diversification
This is perhaps the best attribute a mutual fund has. By actively practising diversification, mutual funds aim to reduce the volatility of returns. This is achieved by investing in a number of companies across a broad section of industries and sectors. As the saying goes, it prevents an investor from putting all eggs in one basket. Mutual funds generally invest in a variety of investments, including stocks, bonds and money market instruments or any combination of these. A diversified portfolio can help spread the risk, but that does not mean you will never lose money. Although diversification cannot guarantee profits, it does keep a check on risk and spreads your money in a manner which is the stated objective of the fund you invest in.
Evaluate the performance of the fund
One of the most important characteristics of a fund is its investment performance—how it pays off over time. Successful investors have a very good idea of how well—or how poorly—their investments are performing. One of the best way to evaluate this is to compare a fund’s results with its benchmark and peers.
Just the way one should evaluate one’s investment plan annually or at times of significant life events (marriage, birth of children, retirement, etc), it is necessary to evaluate the performance of the funds one invests in.
Evaluation of the fund’s performance should be at the time of investment and should be carried out periodically depending on your investment time frame. For instance, if one has invested in a fund with a three- to five year time frame, it would be best to check the fund’s performance once a year to ascertain its progress and decide about its continuation or exit from it.
