The potential of high returns often lures investors towards mutual funds. However, investing in mutual funds is not easy. You require discipline and patience. Moreover, you need to understand the market well and undertake in-depth research to generate high returns. Despite these tactics, the stock market volatility can confuse you and likely erode your mutual fund returns. But if you use the right investing techniques, you can potentially avoid losses and maximize profits from mutual funds.
Here are some of the textbook investing techniques you must know:
- Avoid the herd mentality: You are different from your friend or colleague. Therefore, do not let the investing decisions of another individual impact your mutual fund choices. Avoid the herd mentality and invest according to your risk appetite, time horizon, and financial goals. If your friend is investing for the short-term, it is not advisable to do the same if you can stay invested for a long duration. Long-term investments in mutual funds can generate high returns.
- Know your time horizon: Everyone has a different investment goal, such as saving for a house, buying a car, funding children’s education, etc. No matter your goal, the key to profitable investing is to understand your time horizon. Typically, long-term investments are for five years or more. By understanding your time horizon, you can choose the right mutual funds. Your time horizon also affects your tax rates on mutual fund returns. Long-term investment gains are taxed at a lower rate than short-term gains.
- Understand your risk tolerance: Mutual funds are subject to market risks, especially in equity mutual funds. Hence, ensure you understand the risks inherent in your mutual fund portfolio before you invest in them. Assess your risk tolerance (capacity to bear losses) and invest accordingly. If you are a high-risk investor, you can allocate 70-80% of assets in equity and the remainder in bonds or other secure investments.
- Create a diversified portfolio: An investing trick that never gets old is diversification. Spreading your mutual fund portfolio across different assets allows you to minimize risk and maximize profits. Choose assets that are not correlated, like stocks, bonds, alternative investments, etc. Further, even in a particular asset category like stocks, aim for diversification by opting for large-, mid-and small-cap stocks, as well as, growth stocks, value stocks, etc.
- Check the cost of investing: The thumb rule for mutual fund investing is to assess the cost. All mutual funds require you to pay an annual expense ratio, a fee for running the fund. The expense ratio is typically a percentage of the total assets of your mutual fund. As a wise investor, choose a mutual fund scheme with a low expense ratio.
- Monitor your mutual funds consistently: Even though there is no need to aggressively monitor mutual funds, you should do a periodic check to ensure your portfolio aligns with your risk tolerance and financial goals. You can rebalance your portfolio to take advantage of potential market upswings or avoid losses from market downturns. However, short-term volatility is temporary and should not be a governing force for rebalancing your mutual funds.
Using these sound investment tactics can help you build a secure and profitable mutual fund portfolio. You can use the Tata Capital Moneyfy app to start investing in a mutual fund scheme of your choice. Moneyfy allows you to compare different mutual funds and make an informed decision.