Published on September 3rd, 2019
Investments in mutual funds have been on the rise lately as people want to mitigate the risks involved in direct stock market investments to some extent by going through the mutual fund route.
Mutual funds are investments in the debt and equity market as well but are managed by professional fund managers, and thus, chances of losses are reduced to a considerable extent.
It is mostly said that higher the reward means higher the risk, but the same cannot be said for it in reverse order unless you know the tricks for risk mitigation.
Here are the few tricks to keep in mind when it comes to mutual fund investments:
1. Consider Your Risk Appetite
Your mutual fund portfolio should be aligned with your risk appetite and profile. It can be evaluated by considering your age, income, career growth, current financial health, and other financial parameters.
You can invest in more aggressive mutual funds with high returns high-risk funds allocation if you have high-risk tolerance level and vice versa.
The trick here is to create a balance in your mutual funds portfolio by allocating a certain portion to high return high-risk mutual funds and other in low-risk medium returns and low-risk low returns.
Do a little research and find the right balance between debt and equity in your mutual fund portfolio. It helps in anchoring your investments during declining and slow financial markets.
2. Investing In NFOS
One should not jump into investing in NFOs blindly and must do proper research into how the respective fund manager and fund house has been managing their other mutual fund schemes. It gives a good idea as to whether you should be investing in the particular NFO or not.
Check the offerings of the NFO carefully and invest only if it meets your risk appetite and investment goals.
You do not want to derail your mutual fund portfolio by one wrong investment, so tread carefully when investing in NFOs. Always do your research thoroughly before making any decision.
3. SIP Based Mutual Fund Investments
Investing through SIPs or systematic investment planning is a great way of adding to your mutual fund portfolio in an auto-pilot mode.
In SIP-based mutual fund investments, a particular amount is invested in the mutual fund scheme of your choice every month regardless of its NAV on the given date.
It actually does the job of averaging out the mutual fund cost to you by investing through the slow and bullish market. It is also a way to discipline your finances as money is deducted automatically from the bank.
4. Have A Diversified Mutual Fund Portfolio
Instead of investing all your money in one mutual fund scheme, it is essential to diversify it no matter how lucrative it sounds. If you choose to concentrate on just one market or scheme, and if the market crashes, you will not have any backup.
Thus, it is best to pick up schemes in different industries and even fund type so that you can lower the risk. In case a particular mutual find does not do well, the others will help you make up for that loss.
5. Invest Lumpsum Surplus Using Systematic Transfer Plan (STP)
You can directly money from one mutual fund to another using STP. It will help you spread your funds in different mutual funds and over a period of time without having to risk your money in markets that are clearly overvalued.
This plan will work perfectly for you if you are looking to invest in mutual funds for the long term. You will have the opportunity to transfer equities to short-term debt funds to lower risks.
When trying to allocate funds to mutual funds, it is a good idea to check the free online lump sum calculator to understand how much returns you can expect.
You will be able to know an estimate as to how much your mutual fund worth would be a few years down the line.
Doing so will help you lower your risk and allow you to invest for a time period where you will be able to see excellent results.
The calculator can be used by not just beginners but experienced investors as well to help them project their future returns on their investments.