10 things to remember if you are investing in units of a mutual fund

They work well for investors who aren't adept at picking stocks, debt and other instruments. Yet, one must consider a host of factors before choosing a scheme or fund house

Many who enter the stock market for the first time or aren't otherwise adept in analysing trends and company fundamentals, try to make a quick buck leaning on tips from friends and so-called experts--and often end up burning their fingers in the process. It would have been much better for such investors to trust their money with a good mutual fund house, whose manager would take on the burden of generating a decent return for them.

Having said that, there is an entire universe of options in the MF space, with several fund categories and investing methodologies that could end up confusing the lay investor. In order to address this issue, Business Standard provides a set of guidelines you can use to choose the fund houses and schem.es best suited to you

1. MF categories: Mutual funds are primarily categorised based on the underlying assets in which they invest. A scheme with a strong bias towards stocks is called an equity-oriented scheme while one that invests mostly on bonds, debentures and the like is debt-oriented. A scheme that allocates its corpus to both debt and equity is called a balanced or hybrid fund. Then you have other schemes that invest in gold and real estate. Some schemes are also named on the basis of the underlying theme. These are the kind that invest heavily in a particular industry or sector, such as pharma, IT, public sector enterprises, among others.

2. Taking a SIP: Systematic investment plan are a popular mode of investing in the MF space for their affordability--you don't invest big money in one shot, but spread it over several months, thereby maintaining liquidity. SIPs also give fund managers room to reduce the impact of market volatility, as they can buy on dips and reduce the cost of acquisition for the subscriber when the market is down. Conversely, they also pick up stocks when the market rises to capitalise on the uptrend.

3. Understanding risk: Remember, no investment strategy is completely risk-free. You would have heard the caveat at the end of many MF ads on television that goes: 'Mutual funds are subject to market risk. Read the offer document carefully before you subscribe'. So when you are looking for for a fund house or scheme, factor on your risk tolerance and return expectations before you choose something.

 
4. Risk appetite: Your ability and willingness to take a loss when the chips are down is your 'risk appetite'. Generally, the younger you are, the greater this appetite. And the higher the returns offered by a scheme, the greater the risk associated with it.
 
5. Asset allocation:  Don't put all your eggs in one or two baskets. Try and spread your MF portfolio as it is always better to compromise on returns to some extent instead of incurring a big and sudden loss in a bad market. You could spread your risk by having a mix of debt, equity and gold ETFs for instance.

 
6. Tip to pick: The options in the mutual fund universe are vast and could often confuse the investor. Stay focused on your financial goals instead of getting taken in by the appealing features and hyped-up benefits many schemes offer. You might want to approach a reputable financial planner to help you.
 
7. Tax breaks: These are available for investments made in equity-linked savings schemes (ELSS), under Section 80C of the Income Tax Act. If you have not already exhausted the Rs 1,50,000 limit under this section, you may want to consider investing in this space.
 
8. Rebalancing: Review your portfolio periodically for the returns it has been offering, or when there is a major event in your life, such as a marriage, children's education, job loss, etc. You may then want to enter new schemes, exit old ones fully or partially, or take larger exposures to existing schemes. The changes you make in your portfolios is called rebalancing.

 
9. Trending updates: The market is dynamic and follows economic trends such as changes in corporate regulations and developments, geopolitical events and tax laws, among other things. Keep track of them and make alterations to portfolio, with help from a professional advisor, if necessary.
 
10. Other important factors: Don't be obsessed with returns. Consider the investment horizon, and your own financial situation before parking funds. Do not overstretch and do not borrow to invest.

BOX: Six benefits of SIP
 
1. A SIP is a simple, hassle-free investment method that allows you to put money in amounts as low as Rs 500 a month at regular intervals. This way you get to participate in a high-return investment avenue without blocking liquidity.

 
2. You can start an SIP sitting at home or at the office. All you need is a computer or smartphone, your KYC and a good internet connection. Simply visit the website of the fund house you have chosen and go to the SIP page to get started. You can pay online to subscribe. The whole process should take no more than a few minutes.
 
3. Once you complete all the formalities, the SIP amount will be auto-debited from your savings account on a fixed date each month. You will, in all probability, get an SMS alert from the fund house to maintain sufficient balance in your bank account.

 
4. You can check the value of your SIP holdings over time on the app or website, to figure out how your investment is panning out. You can also use the SIP calculator to figure out your tax deductions
 
5. SIPs give you the advantage of compounding and rupee cost averaging.
 
6. Investors are free to stop their existing SIP accounts whenever they want, or increase the investment amount.