Mutual funds are a popular investment option. And, for good reason. Some of its many benefits include superior returns, significantly lower risk, expert management, tax-efficiency, diversification and liquidity, among others.
This article can help new investors learn about mutual funds and what they need to consider before investing.
What are mutual funds?
A mutual fund refers to a pool of money from investors that are invested in shares or bonds of companies. Mutual fund investments are managed by professional managers whose aim is to generate returns by efficiently allocating the fund’s assets.
You can invest in mutual funds either via a Systematic Investment Plan (SIP) or lump sum method. SIP investment enables you to invest a specific amount periodically, whereas the lump sum mode invests in one go.
Below are some vital factors to ponder before you decide to invest in mutual funds online.
- Choose a suitable plan
Mutual funds’ benefits largely depend upon the type of mutual fund. There are many types of mutual funds that vary based on their structure, investment horizon, risk and investment objectives. You can study different plans and choose a mutual fund most suitable for you.
For example, the Indian government is aiming to kick off infrastructure projects worth Rs.100 trillion in the coming years. So, you may want to pick up a mutual fund plan that predominantly invests in infrastructure. However, bear in mind the investment horizon, while investing in such funds, since infrastructure projects take time to complete. Hence, steady returns can only show after a few years.
- Assess the risk-return ratio
Before investing in mutual funds, assess your risk appetite. For instance, if you are looking for decent but quick returns, you can opt for liquid funds. These funds mainly invest in lesser risky instruments like debt, money-market instruments, government securities, treasury bills, commercial papers, certificate of deposits, etc. Likewise, if you aim to build long-term wealth and can bear some risk, you can consider investing in equity funds.
- Invest as per your age
Your risk-bearing capacity mainly depends upon your age. Therefore, it is advisable to plan your investments accordingly. For instance, the younger populace can benefit from investing in the infrastructure sector, given the extended time horizon for such funds to show positive results.
On the other hand, those closer to retirement can opt for mutual funds that invest in mature companies that offer yields regularly.
- Invest as per your needs
Every investor aims to earn high returns. However, one must look at investing based on future needs and goals. You can invest with the aim of purchasing a home, towards higher education, children’s marriage and so forth. Look for a plan that aligns with your financial aspirations.
Mutual funds offer several investment options that can suit the financial goals of every investor. Consult a financial professional who can guide you on how to invest in mutual funds and help mitigate your investment risk.
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