Do’s and don’ts while investing in MFs

Whenever we start a habit, a discipline or an activity, we often abide by a rulebook. Be it fitness or investing. Certain rules are non-negotiable. For instance, no junk food; no soft drinks; regular exercise etc. We may not follow it to the last word, but it gives us boundaries within which the activity has to be done.

Same goes for investing in mutual funds. It is a common myth that mutual funds are too risky for a first-timer to invest in; too complicated for layman to understand, etc. But every learning starts with a first step, right?

The first step to investing in mutual funds is, knowing what to do and what not to do:

Do's

1. Do your homework: Investing in a mutual fund requires you to know certain facts about the industry, product, etc. Before you make your investment, you must read the regulatory documents pertaining to the schemes such as the Factsheet, the Scheme Information Document (SID), and Key Information Memorandum (KIM), Statement of Additional Information (SAI), etc. and then make an informed decision.
2. Diversify: Mutual funds allow you to invest across the asset classes in the securities markets, be it equity, debt, or both. But the important point to remember here is that an asset class in isolation is not strong enough to support the growth of your money. Diversification means investing across a combination of asset classes so that the overall risk is reduced and you can benefit from the growth potential of the different asset classes.
3. Start early, invest regularly: A thumb rule for all kinds of investing – start early. Especially the age at what you are, investing should be at the top of your to-do list. Your first paycheque must be the first step towards your long term plans. Starting early gives you the most important advantage of investing – compounding.
4. Start with SIPs: A tool for every investor to build potential wealth with time. Systematic Investment Plans, offered by mutual funds allow you to invest as low as Rs. 15,000 every month in a particular scheme and continue it for as long as eternity. SIPs are believed to effectively ride market volatility and generate superior good returns in the long term.

Don’ts

1. Don’t blindly chase returns: We understand that the most important part of mutual funds is the returns they generate. But another very important fact to remember is that returns do not determine how good or bad a fund is.
2. Don’t withdraw when markets stumble: Equity markets, by nature are such that they are prone to fluctuations over the short term. But if you consider a longer time horizon, they tend to stabilize in terms of volatility. Thus, when markets seem to stumble, you must hold on tighter than ever, because the same fund’s position that may seem as a threat then, could see chances of recovery and a possible gain, in the future. This is also one of the most common mistakes that investors make and end up taking the wrong decision.
3. Don’t ignore expenses related to the fund: Every mutual fund scheme has certain expenses pertaining to it. Before investing or redeeming your investment in a particular fund, be completely aware of the additional charges/ fees attached to it – such as exit loads, expense ratio, etc. These fees could help you determine which fund to invest in, how long to hold it and much more. Information pertaining to these charges/ feesexpenses is available in the regulatory documents of the particular scheme.
4. Don’t try to time the markets: Most market experts advise you to keep emotions at bay while investing in the equity markets. Despite that, what most investors do is follow the herd; invest when markets are high and withdraw when low. The most effective way to escape from timing the markets is to invest irrespective of the market situation – this will help you get the best of whatever phase the market is in, and in long term benefit you.

You need not follow this verbatim, but every now and then adhere to it. These basic do’s and don’ts will help you stay grounded while building your future with mutual funds.

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An Investor Education & Awareness Initiative by HSBC Mutual Fund

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