Mutual Fund Tip #1: Mutual Fund is not GamblingThe first and most important tip for beginners in mutual funds is to have realistic return expectations. Mutual funds will not give you 30% return in 1 year. Neither are mutual fund returns guaranteed. Mutual funds are not 100% safe like bank FDs and at times, you may even lose money when you invest in bad quality mutual funds. So, when you start investing in mutual funds, invest with realistic return expectations, select fundamentally strong schemes, invest for the long-term and be prepared to make mistakes or book losses.
Mutual Fund Tip #2: Be SMARTYou can become a successful mutual fund investor only if you invest as per your financial goals. Financial goals are simply your dreams with an end date. For example: I wish to buy a Kawasaki Ninja in the future is a poor financial goal. But, I plan to buy a Kawasaki Ninja in the next 2 years and will need Rs 23 Lakhs is the perfect example of a SMART financial goal. Setting a financial goal helps you decide which type of mutual fund is best suited to your needs.
|Years to Goal||Type of mutual fund|
|1 month - 18 months||Liquid/money market funds|
|24 months - 36 months||Debt mutual funds|
|More than 36 months||Equity mutual funds (large-cap)|
Mutual Fund Tip #3: Use Riskometer to Select Suitable SchemesMutual funds are risky. There are no “guaranteed returns” in mutual funds. Debt mutual funds carry lower risk than equity mutual funds but there is no ‘zero risk’ mutual fund in India. The risk of a mutual fund can be understood using a riskometer. While investing in mutual funds, you need to match your risk profile with the risk profile of the fund. But remember: Low risk = Low returns & High risk = high returns
Mutual Fund Tip #4: Understand all Types of Mutual FundsThere are nearly 29 types of mutual fund schemes in India. Each type has a separate investment objective and risk profile. Therefore you should learn the basics of all types of mutual funds before investing. [Suggested Reading: 29 Different Types of Mutual Funds in India]
Mutual Fund Tip #5: Asset-Allocation is CriticalAsset allocation is dividing and investing your money in different asset classes to create a balanced portfolio. For example: If you want to invest Rs 5,000 in mutual funds for 5 years and have a conservative risk profile, then you can follow the below asset-allocation.
|Type of mutual fund||Investment amount|
|Debt mutual fund||Rs 2,000|
|Large-cap equity mutual fund||Rs 1,500|
|Multi-cap equity mutual fund||Rs 1,000|
|Gold mutual fund||Rs 500|
Mutual Fund Tip #6: SIP vs Lumpsum - Which is more profitable?There are two popular methods of investing in mutual funds:
- Systematic Investment Plan (SIP): When you divide your investment amount in small parts and invest throughout the year, then it is a systematic investment plan.
- Lumpsum Investment: When you invest 100% of your investment amount at one go, it is known as lumpsum investment.
Mutual Fund Tip #7: Selecting between Growth and Dividend OptionEvery mutual fund scheme has a growth and dividend option. In the growth option, all the income generated by the scheme, like dividends, bonus, etc is reinvested back into the scheme. In the dividend option, you get income at regular intervals. You can select to receive dividends on daily/weekly/fortnightly/monthly/quarterly or annually. For beginners in mutual funds, it is recommended to select a growth option whereas retirees can opt for a dividend option. Note: The dividends earned on both equity and debt mutual funds are taxed in the hands of the investors.
Mutual Fund Tip #8: Do not Over-Worry about NAV and AUM.Another tip for beginners in mutual funds is to not worry about the NAV (Net Asset Value) & AUM (Assets Under Management) of the fund. Beginners believe that a fund with NAV of Rs 800 is better than a fund with NAV of Rs 50. Also, a fund with more AUM does not mean that it's better. There are many hidden mutual fund schemes which have low AUM and NAV but have generated great returns. So, do not overthink about NAV and AUMs as they keep increasing and decreasing as per market conditions.
Mutual Fund Tip #9: Use Power of CompoundingAlbert Einstein famously said, ‘Compound interest is the 8th wonder of the world’. Let us see how compounding really works.
|Monthly Investment||Rs 5.000|
|Investment Period||240 (20 years * 12 months)|
|Future Value||Rs 38,28,485|
|Total Principal Invested||Rs 12,00,000 (5000*12*20)|
|Total Profit Earned||Rs 26,28,485|
Mutual Fund Tip #10: Split up your Systematic Investment PlanThe idea behind a systematic investment plan is to get better cost-averaging. In SIP, since the investment is divided into 12 months, in some months you get more units (when market and NAV is down) and other months you get less units (when market and NAV is up). So, overall, the cost per unit gets averaged out. To increase this cost averaging further, you should split your SIP amount into weeks. For example: If you invest Rs 20,000 on 5th of every month in Axis Bluechip Fund, then you can do a SIP of Rs 5,000 each on 5th, 15th, 21st and 28th of every month. This way you can increase your chances of buying on market lows. Note: You can choose any dates in a month. There is no science to this.
Mutual Fund Tip #11: Learn Mutual Fund TaxationAn important tip for beginners in mutual funds is to understand mutual fund taxation. Equity and Debt mutual funds have different taxation.
|Type of mutual fund||Holding Period||Capital Gain Tax||Tax Rate|
|Equity/Balanced Mutual Fund||Less than 12 months||Short-term||Flat 15%|
|Equity/Balanced Mutual Fund||More than 12 months||Long-term||10%* above Rs 1 Lakh|
|Debt/Gold/Liquid Mutual Funds||Less than 36 months||Short-term||As per tax slab|
|Debt/Gold/Liquid Mutual Funds||More than 36 months||Long-term||20% with indexation|