As a first-time investor in mutual funds, it is important to take into account the following four points: investment horizon, risk appetite, expense ratio, and portfolio diversification.
Investment horizon pertains to how long an investor expects to remain invested in a particular scheme before selling it. For example, if an investor is investing only for five years, it is recommended to go for safer options.
Then, identifying risk appetite helps in making the right decision while choosing a mutual funds scheme. Take, for instance, those who are risk-averse, debt mutual funds remain an ideal option. Debt mutual funds invest in debt securities. These are relatively safe and they can offer marginally higher returns as compared to bank deposits.
However, those who are ready to take risks, such first-time investors can invest in balanced advantage schemes. These schemes decide the equity allocation based on the market conditions. As compared to pure equity schemes, balanced advantage schemes are relatively safer.
Ideally, pure equity schemes are not recommended for those with an investment horizon of five years. This is an ideal option for those who plan to stay invested for at least seven years. However, look forward to investing in safer options like large-cap schemes and flexi-cap schemes.
Avoid chasing returns and getting into risky options such as small-cap schemes or sector schemes, among others. These schemes are suitable for aggressive investors who are open to taking risks and face volatility.
Then, consider the expense ratio, which is the annual maintenance fee that an asset management company (AMC) charges for managing investments. This tends to impact the returns of a particular scheme.
Finally, it remains crucial to maintain a diversified portfolio and not aim to invest in one type of mutual funds scheme. Diversification helps to minimise the overall risk associated with the portfolio.
Most importantly, it is advised to seek professional advice and not invest in a mutual fund scheme without understanding the fine print.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
