5 Golden Rules of Mutual Fund Investing for First-Timers

Now that you have decided to become a mutual fund (MF) investor, start by getting to know some golden rules for first-timers. Use these rules to align your investment goals with your portfolio so as to achieve the best returns over your investment horizon.

Let’s go through the five golden rules of MF investments.

Rule #1 Allocate assets as per your financial goals

Before you start investing, define your investment philosophy and assess your objectives. It is only then that your investment portfolio will be able to meet your goals. For instance, if your investment goals are short-term, like creating an emergency fund, then a higher allocation to debt-based funds is advisable. Whereas, if you've embarked on a long-term investment journey for, say, retirement planning, then keep a higher allocation in equity funds.

Rule #2 Diversify your portfolio to reduce risk

The second mutual fund rule is to never put all your eggs in one basket. Diversify your investments across equities, debt funds, and alternate investments. Here, it is important to ensure that you include assets with low correlation to the overall portfolio so that the under-performance of one asset class can be offset by the performance of the others. For example, under-performance of the equity market can be offset by other less-correlated assets like debt, real estate, etc., which may be performing better.

Additional Read: Tips To Invest In Mutual Funds

Rule #3 Rebalance portfolio periodically

Since the under or out-performance of an asset class can skew the portfolio, your asset allocation might change. For instance, a portfolio with a 70:30 ratio in equity and debt may become partial to the equity class in the long-term due to appreciation in its value. If not tackled via portfolio rebalancing – periodic buying and selling of assets to bring allocation to desired levels – this could create risks beyond your endurance capacity.

Rule #4 Invest regularly to beat market volatility

Another golden rule of mutual funds is to invest in regular intervals. This will not only discipline your investment habits but will also help you tide over market volatility since you can buy more units at lower prices and vice-versa. Systematic Investment Plans (SIP) are an ideal option if you do not have a lump sum to invest. You can begin investing in SIPs with as little as Rs. 500 per month.

Rule #5 Invest long-term for wealth creation

If solid wealth creation is your investment goal, then think a long-term horizon. Nevertheless, the general rule of the MF market is to only invest in the short-term if your goals include short-term needs. Otherwise, earning substantial returns is very much possible despite market volatility. Practice risk diversification, portfolio rebalancing, and long-term investing.

Additional Read: What Are the Advantages of Investing in Mutual Funds?

Bottom Line

Now that you know the golden rules of investing, don’t waste a second! Use Tata Capital’s Moneyfy app to explore different schemes. Compare funds, browse our top picks, and begin your investment journey in just a few clicks. Complete your mutual fund KYC process and become a market-savvy investor today!