Mutual funds have expanded the investment universe of investors by allowing them to invest in different asset classes in a simple, yet effective, way. Even better, investors can keep allocation to different asset classes in line with their risk profile at all times and benefit from investing in funds following different investment strategies. Besides, full time professional fund managers manage money in line with their defined investment objectives. The tax efficiency of returns allows investors to keep more, and that goes a long way in ensuring that they have sufficient financial resources at different stages of their lives.
However, only a small segment of investors has been able to make the most of these opportunities. There are a number of reasons that impact the final outcome of investors’ investment process over different time periods. In fact, even the impact on their portfolio returns varies, based on when and how they invest as well as how soon or late they start their investment process. While some investors fail to accumulate the kind of corpus they require to fulfill their goals, there are others who don’t even start making their investments for fear of either losing a part of their capital or earning very low returns. Then there are those investors who show complete disregard to their asset allocation and the risks associated with the portfolio imbalance in their quest to maximize the returns. It is a proven fact that asset allocation plays a significant role in creating the right balance between risk and reward. Besides, rebalancing either up or down, is a necessary ingredient for the long-term success. Portfolio rebalancing is a process of bringing the different asset classes back into proper relationship, following a significant move in one or more. Another important aspect is not to lose sight of long-term objectives. Investors must remember that shifting focus on short-term goals at the cost of long-term ones can expose them to serious financial risks.
As is evident, investors must follow the right investment process to get the best from mutual funds. If you are looking to start planning investments in mutual funds, here’s what you need to focus on:
PLAN YOUR INVESTMENTS
It pays to begin investing after doing some groundwork. There are three steps that can help determine an action plan. First, you must begin by making a list of investment goals to be achieved during short, medium and long-term horizon. Second, you need to assess your current position in the financial lifecycle. Third, you must decide as to how much risk you are willing to take to earn your targeted returns as well as what is your capacity to take these risks. This is critical as different financial objectives require different investments.
SELECT YOUR INVESTMENT OPTIONS CAREFULLY
In today’s ever-changing financial environment, it pays to allow professional fund managers to manage your hard-earned money. Though investment risks and economic uncertainties can never be eliminated, professionals managing your money in mutual funds can help you tackle them more efficiently. Hence, you must make mutual funds an integral part of your portfolio. However, to benefit from their expertise to the fullest, it is necessary to invest in the right type of funds, i.e., invest in those funds whose objective matches with yours.
FOLLOW A TAX-AWARE INVESTMENT STRATEGY
Many of us have the habit of investing in a haphazard manner to save taxes. That’s because we consider tax saving investments a burden rather than a tool to get the best in terms of saving taxes as well as making our money grow. There is a need to integrate these investments into your overall investment programme. Besides, you need to adopt a disciplined way of investing rather than investing at the fag end of the year.
After determining your overall exposure to equities, you can invest in Equity Linked Savings Schemes (ELSS) of mutual funds. Being equity-oriented funds, these have the potential to provide better returns than most of the options under Section 80C.
Another notable feature is the tax efficiency in terms of returns earned through them.