Monday, January 08, 2007

Ground Rules for Mutual Fund Investing

Ground Rules for Mutual Fund Investing

Having demystified the concept of Mutual Funds, let us now traverse the investment jungle!!!

How can you tell whether a particular Mutual Fund is right for you? The only sure way is to become familiar with the language used in the Fund industry and to have a sound investment strategy. Throwing your money haphazardly into investments that you don't understand is a sure way to lose it quickly. Does this mean that you should keep your money safe by putting it under the bed or keeping it in the bank? No – all you need to do is set the ground rules for successful investing.

First and foremost, you have to define your investment objective.

Successful investing is a journey - not a one-time event - and you need to prepare yourself. What is your destination? How long will it take you to get there? What resources will you need? These are questions you must first ask yourself. The plan that you come up with will depend on your investment goals. Nobody knows you and your situation better than you do. Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses and a whole host of factors.Therefore, the first step should be to assess your needs. You can begin by defining the investment objectives, which could be regular income, buying a home or financing a wedding or educating your children or a combination of all these needs.

Define your cash flow requirements.

A careful assessment of your investment objectives will enable you to estimate the amount of money you require for satisfying your various needs at different points of time in your life.

Determine your risk appetite

Your objectives should be realistic and move in tandem with your risk tolerance. How much, or how little, of risk can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatility then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits.

Identify Funds with matching Investment Objectives

Finally, zero-in on the Mutual Funds that meets your risk tolerance (needs) and risk capacity (budget) levels. If your aim is to increase the value of a portfolio through Mutual Funds, look for Growth Funds that focus on capital appreciation. If you are income-orientated, you will want to choose funds with dividend-paying stocks or Bond Funds that provide regular income. (You have already been exposed to the various types of Mutual Funds. This will come in handy here.)

Making informed investment decisions entails not only researching individual Funds but also understanding your own finances and risk profile. To get an estimate of the schemes suitable for certain levels of risk tolerance and to maximize returns, you should have an idea of how much time and money you have to invest and the returns you are looking for.What you achieve as an investor will depend on your goals, but sticking to these simple steps will help keep you on the right path. Bon voyage!

2 comments:

pugazhanthi said...

Can I have a suggestion.
Can you make a graph and comparision sheet like showing the risk, grouth, on several schemes like dividend scheme,bond fund, growth fund etc, because it will be a quick guide for people to cross refer their planning even if they left out some points to be considered while selecting the method of Investment.
(I have heared from some people saying that "Ohh I didnt noticed these points otherwise I would have opted for some other schemes for investing". It can be avoided if we have a check list and a statment with us)

Lalitha Muthu said...

Investing is more of an art than science. It is subjective and not objective. There are several tools that can be employed but none of them are foolproof. There cannot be any hard and fast rules for selecting the right Fund. If it were true, there would only be princes and no paupers on the promenade. I will be dealing with the evaluation of funds in detail in the forthcoming blogs. Follow them diligently and you would not regret having missed out on important points while selecting the Mutual Fund schemes.