15 Golden Rules of Mutual Fund Investing You Must Know

Dec 11, 2018 | 5 months ago | Read Time: 3 minutes | By Dev Ashish

One of the best financial instruments to accumulate wealth are mutual funds. Given their structure and investment mandate, the equity funds are capable of inflation-beating returns in the long term.

Let’s have a look at some rules that can benefit you as a mutual fund investor:

  1. Before investing in mutual funds, find out your financial goals and try to align all your existing and future investments to these goals. This helps in selecting the right mutual funds to achieve the goals within the set timeframe.
  2. For short-term goals, you can stick with liquid or ultra-short duration goals. For long-term goals, most of your investments should go towards equity funds. For medium-term goals, a combination of the above two types of funds can be taken.
  3. Never pick funds based just on 1-year returns. It’s best to ignore short-term performance and prefer long-term performance consistency. Sticking to well-proven funds offering consistent returns (over 3,5,10-year periods) in the chosen category is the way to go.
  4. Ensure that the funds are spread across Asset management companies (AMCs), different categories and investment styles. In addition, the fund returns should atleast be comparable to the benchmark and better still, in the top quartile of the category. But do not over-diversify when picking funds. Having 5 to 7 good equity funds for the goal-oriented portfolio is more than enough.
  5. It is best to leave sector funds and thematic funds for sophisticated investors. Regular investors are adequately served by well-diversified equity funds like large-cap funds, multi-cap funds, mid and small cap funds, etc.
  6. Do not invest in randomly selected funds or on the advice of your friends or colleagues. Proper fund selection requires analysis of various factors and scheme suitability with respect to your goals. If you can do it yourself then that’s good. Else, you should get in touch with an investment advisor to help you invest in mutual funds.
  7. Do not try to time the market. Best way to invest in mutual funds is via regular (monthly) SIPs or Systematic Investment Plans.
  8. Try to increase your SIP every year in line with the increase in your income. For example – if you have a SIP of Rs 20,000 in the current year, try to increase it by (let’s say) 10% to Rs 22,000 next year. This will ensure that over the years, you will accumulate significantly bigger corpus than what would have been possible with a fixed SIP amount.
  9. If you have lumpsum to invest in mutual funds, then you can do two things: i) invest in lumpsum in equity funds ii) put money in debt funds and then run periodic Systematic transfer plan(STP) into the equity fund. The second approach is suggested for most people as it reduces the risk and helps average out the entry into the chosen funds.
  10. Every few years, markets will fall. So, the investment value will go down in such times but that is normal. This is not the time to panic and exit your investments. In fact, it’s rather a very good time to invest additional amounts if you have it spare.
  11. Your mutual fund portfolio needs periodic monitoring – atleast once a year. Building a well-performing and well-diversified mutual fund portfolio is not a one-time activity. Comparing the performance of the funds with goal-specific return assumption, its benchmark and category help in the review of the funds. In case some of the existing funds are not performing as per expectations, the same should be replaced.
  12. But do not replace a fund just after a year of underperformance. It is best to give about 2-3 years to funds to show their worth.
  13. Don’t change funds every year based on star ratings. There is no guarantee that the highest rated fund this year will be the best performing fund next year.
  14. Equity funds are to be invested for long term. Do not monitor the fund NAVs daily. It is of no use.
  15. Always keep a separate emergency fund so that you do not end up dipping into your long-term savings (via mutual funds) to fund the unplanned expenses.

Creating wealth using mutual funds is not difficult if you continue investing regularly for long-term and routinely review and realign your investments to make course corrections.

The above tips are not foolproof but will help you stay on course for your financial goal achievement in the long term.

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