Mutual funds are the go-to financial instruments for those with little market expertise or time to manage their own portfolios. No wonder the Assets Under Management (AUM) of the Indian mutual fund industry stood at ₹39,42,031 crore on March 31, 2023, growing 5x in the 10 years since 2013.

Investing in portfolios managed by market experts can help you mitigate unsystematic risks associated with stocks. SIPs, STPs and SWPs help build investment discipline while providing tax advantages. If you are a beginner and curious to learn how to invest in mutual funds, here are the golden rules that will help you make the most of #YMYL.

1. Align Your Investments to Your Financial Goals

Define your financial goals before you start investing. This seems complicated initially, but is a crucial step, especially for first-time investors. Having clarity on your timeframe, financial objectives and risk tolerance helps in identifying the most suited funds for your investment persona and goals. For instance, someone planning for the long term, say retirement, at 25, may give higher weightage to equities in their portfolio. On the other hand, while creating an emergency fund for the short term, it is advisable to invest in debt funds.

2. Account for Taxes

Not considering the capital gain tax is one of the most common mistakes among novice investors. Returns, after-tax deduction, is what truly matters at the end of the day. Therefore, knowing the tax regulations and incorporating them while estimating returns and developing a portfolio is vital to prevent any shocks later.

3. Time Horizon over Risk Appetite

Risk and volatility get smoothed out in the long term with consistent investment and a small amount of capital. It gives cost-averaging benefits in the long run. Therefore, when picking the right mutual fund to invest in, traders give time horizons higher weightage than their risk appetite. Investing regularly with little funds and occasionally with lumpsum amounts can help build a robust long-term financial portfolio.

4. Diversify and Rediversify

Maintaining a balance of high-risk/high-return and low-risk/low-return investments is critical to ensuring the health of the portfolio. Seasoned investors periodically visit their portfolios and ensure that it aligns with their short- and long-term financial goals. For instance, an 80:20 ratio of equity to debt funds may skew the portfolio to long-term asset appreciation while increasing the risk. Balancing it to 60:40 may improve risk endurance and offer short-term benefits.

5. Learn the Different Modes of Investing in Mutual Funds

Educating yourself about managing and balancing your portfolio from time to time is indispensable. Investing in mutual funds is not just about SIPs. There are many ways to take advantage of pooled investments. Based on capital flow, you can pick one that better meets your requirements. Here’s a look at them:

  • Systematic Investment Plan (SIP): The most common way of investing a fixed amount in a mutual fund is on a monthly or quarterly basis.
  • Systematic Transfer Plan (STP): This is a way of systematically transferring funds from one mutual fund to another. This allows a systematic way of redistributing your capital among different assets.
  • Systematic Withdrawal Plan (SWP): This helps investors with a need for regular cash flow. They can invest in mutual funds through any of the modes while withdrawing a fixed amount regularly.
  • Lump Sum Investment: This is like buying equities. Investors put in a comparatively larger amount of capital at a single point in time.

6. Do Not Try to Time SIPs

Any systematic and consistent investment plan has one goal – to eliminate short-term volatility risks. Therefore, trying to find the “perfect” time to start investments is futile.

7. Do Not Follow the Herd

Do your own research to evaluate what meets your goals and aligns with your requirements. Do not just invest in something because it is “popular,” especially those doing the rounds on social media.

8. Do Not Only Invest in Close-Ended Funds

Committing a large sum to a fund in the long run and wiping out your liquidity is never a good idea. Always keep some open-ended funds for emergencies and financially challenging times. That is what investment planning is all about.

Learning all you can about how to invest in mutual funds is the first step in starting your investment journey in the spirit of #YMYL. And remember, starting early is the best way to give enough time for your wealth to grow.