When it comes to investing in mutual funds, mere mutual fund comparison to choose the best mutual fund schemes for your investment portfolio might not be enough. There are certain things that you as an investor must be aware of. In this article, we will understand four such things that you as an investor must keep in mind before investing in different types of mutual fund investment plans.
Things to keep in mind while investing
Following are a few things that an investor must be aware about before investing in mutual funds:
- Asset allocation strategy
The asset allocation strategy is determined by certain aspects of risk – how much risk an investor can afford to take? How much risk does an investor need? And lastly, how much risk is an investor willing to take? Once you are clear on these questions, it will be easier for you achieve the broad framework for asset allocation – i.e., where should an investor invest and in what proportions. Based on your investment horizon, you can break your investment portfolio into three or four components – short-term financial goals that need to be in investment options with low risk profile such as fixed-income instruments, medium-term financial goals that can be invested in securities with slightly higher risk profile such as mix of both equities and debt, and long-term financial goals that can be allotted to securities with high risk profile such as equities.
- Portfolio diversification
Diversifying your investment portfolio is a way of allotting and investing your money across different types of securities, asset classes, and locations. This helps an investor to considerably reduce their risks without compromising too much on the returns. Hence, rather than putting all your eggs in one basket, diversify them across different types of investments.
- Maintain liquidity
It is important to maintain enough liquidity that can easily protect an investor against loss of income or drop in income or any other type of emergencies. Hence, it is recommended that an investor has an emergency fund in place that can cater to any type of emergencies that might come their way during their investment journey. As a general rule, it is advised to invest at least three to six months of your living expenses in securities that offer high level of liquidity with decent rate of returns such as money market instruments or cash and cash equivalents.
- Reviewing financial portfolio
It is extremely essential for an investor to conduct regular reviewing of their financial portfolio. This will help an investor to distinguish underperforming funds and reallocate their investment if the mutual fund scheme has been constantly underperforming as compared to their underlying benchmark indices and other peer funds belonging to the same category of the mutual fund scheme. Additionally, all long-term investments are likely to turn into mid-term investments and ultimately into short-term investments over time. And it is crucial to appropriately adjust your mutual fund investments when the financial goal is near completion.