If you are a first time investor, many financial advisors would point to the balanced funds or the large capital funds. This is because both these options are considered safe bets for amateur investors who have not yet seen the exaggerated market fluctuations.
But even if you have taken the advice, you will soon be floundering on the structural formation of your portfolio, because of the lack of knowledge on investment methods. Here are some tips for first time investors.
Risk Profile
This is an important step that every investor should consider before deciding on the investments. In fact, the SEBI (Securities and Exchange Board of India) has recently released a regulation that requires clients to do a total risk profiling process before investing. The risk profile takes into consideration factors like:
- Investor age
- Objectives of investment
- Liabilities and income
- Existing investments
- Risk tolerance
These factors are assessed beforehand, so the investors in Indian mutual funds are armed well before they decide to embark on the mutual fund arena. The risk tolerance levels are vital for choosing the funds.
Investment Objectives
Investors should choose funds based on the long term ad short term goals they possess. An equity fund, for instance, is better, if you are saving for your daughter’s marriage. On the other hand, if the goal is a short term like owning a home in two years, equity is not an apt choice.
Existing Investments
If you are involved in investing related to market tools other than mutual funds, like PPF, fixed deposit or direct equities, you then need to decide on the amount of money you want to invest in the mutual fund. Though equities are looked upon with suspicion by many investors, it is a beneficial investment in the long term.
Gaining Knowledge
Though mutual funds have expert advisors to guide you on the right choice, having solid knowledge on the process will be a great advantage. This can be gained via reading the fact sheets, newsletters, daily net asset values from the mutual fund websites and the fund managers, and reading the sales, redemption prices, and report analysis from the newspapers.
Investment Time horizon
The time horizon is an important element to consider in mutual fund investments. Investments related to fixed income should be based on the interest rates present, while the equity funds give best returns when allowed to grow in the long term.
Assessing the Risks
Returns and risks are two integral aspects of investment that go hand in hand. By arriving at a balance over these two factors, the profits can be maximized. Risk tolerance which is the capability of a person to acknowledge swings in the investment prices should be analyzed properly.
The risk tolerance and appetite for risk should be balanced with both the risk and return the mutual fund offers. Diversification to some extent facilitates a better return in this aspect. The performance track record can be used by the investor to decide on the prospective risks and returns present.
The fund house reputation, a track record of fund manager, fund performance at different market cycles, and the expense ratio involved are important criteria that should be noted. By constantly reviewing the portfolio after the setup, an investor can get better results without wandering in darkness.