Making and managing a portfolio is often the hardest part of investing. You should consider multiple factors like your risk appetite and investment goals and select securities or investment options according to that. But your job doesn’t end there. After you have invested, you should keep a close eye on how your investments are performing and make necessary changes to your portfolio whenever needed. But this could turn out to be a chore, especially if you don’t have the time or expertise for the same.
That is where mutual funds could become useful. Let us explore mutual funds and see if they are a viable investment option for you.
What are mutual funds?
Mutual funds are a form of investment where a fund manager creates a portfolio according to a theme that is decided by the fund house and invests money pooled from different investors. Here, you can choose to invest in a fund that matches your risk appetite and goals. For instance, if you can afford to take higher risk and your goal is to create a corpus in long term, you could invest in a mutual fund that primarily invests in equities.
Steps to investing in a mutual funds
The steps to investing in a mutual fund start from understanding your investment horizon, as said above. Once that is done, with the help of an investment advisor, you can proceed to the below steps.
Choosing which funds to invest in
Mutual funds are designed to make investing easier for you. But, ironically, since you have to choose from two thousand funds, it could become confusing. But approaching this methodically can be of help. It starts from choosing which security you want to focus on in your investments.
Equity vs Debt
Equity and debt are the two most popular security options that mutual fund carries. Most mutual funds are focused on either one. Hence, choosing between the two helps you narrow down your options.
Here, equities are stocks of different companies. Instead of directly investing in them, you could invest in a mutual fund that has equities in its portfolio.
On the other hand, debts are fixed-interest securities like government and private bonds, treasury bills, commercial papers, etc.
Equities tend to give you a comparatively higher potential for returns since it depends on the growth of the stock markets. But there is a higher risk associated with investing in them as stock investments can get volatile.
On the other hand, debt has interest-based and not market-linked. Hence, historically, they tend to give lesser returns than their market-linked counterparts. But the risk associated with investing in them is close to zero.
Here, you could choose in accordance with your risk appetite and goals.
Choose the fund
Once you have chosen what kind of fund to invest in, now is the time to choose the fund. Here, the best course of action is to do proper research to find and compare what will work for you.
Lumpsum vs SIP
Next, you can choose whether you want to invest a lump sum amount of money or as monthly installments. The former method can be used when you have a corpus that you need to grow or park safely. SIPs can be used when you want to build a corpus in a longer time frame.
Direct vs indirect plans
For every mutual fund, you have an option to either directly invest in them or through brokers. If you need to invest with ease, you choose to invest through a broker, but it might cost you a little more. On the other hand, the expenses will be lesser if you choose a direct plan, but you will have to complete the whole process on your own.
Mutual fund investments work the best when you choose a fund that matches your horizon. Hence, make sure you do proper research before investing.
