If you are investing in mutual fund schemes then you should always have a clear idea on certain things like your goal for investment, risk tolerance level, asset allocation, time frame, types of mutual funds, tax implications etc. Here are a few things that are explained.
You should decide on right kind of funds in your portfolio depending on your goal. If you are looking for building a corpus for your child's education then you can invest in equity funds.
Again, if you are retired and want a regular income then you can park your retirement fund into Monthly Income Plans (MIPs). So your investment decision should be driven by your goal.
Risk tolerance level
Some funds attracts more risk and some less. So, it is better you should know what is the level of your risk tolerance before investing in mutual funds.
This means you have to get an idea on how much market fluctuations you can tolerate. So, you should decide whether you can take risk, risk averse or a risk neutral person.
Asset allocation is another big aspect. After deciding on your risk tolerance level and investment goal you should start asset allocation - the mix of investment assets.
For example if you are risk lover then you can allocate more aggressive funds and if you are risk averse then you can focus on conservative stocks such as balanced funds and large cap funds.
How long you want to stay invested in, is another important feature. If you have enough funds to invest for a period of say 6 to 7 years then you have the opportunity to choose equity funds over income funds and give some time for growing and building wealth over time.
Types of mutual funds
Having an idea on the categories of mutual fund is in fact the basic requirement for every investor.
There are balanced funds - which are a hybrid of both debt and equity so less risky, large cap funds - a diversified portfolio of top 50 to 100 companies in terms of market capitalisation, Index funds - funds holding stocks in the proportion of their weights, Tax Saving Funds, Monthly Income Plans (MIP) etc.
If you make profits by investing in mutual funds then you are liable to pay the taxes. You must know the tax implications on mutual fund investments.
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The most important thing that you should remember is that you must keep on investing to get more more knowledge on timing i.e. when to enter and exit.
You should have information on expense ratio of the fund and keep a track record on the fund manager as well as the fund's performance during business cycles.