How to Start Investing
With gold and shares being the most sought after Investing arena for investors, how can a beginner invest in shares?
Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the fund’s assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities).
The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.
To begin with investing in mutual funds, be sure to know your investment goals and the time frame available to invest before you would utilize it. The goals could be buying a house, car, children’s education or marriage or even a dream vacation. Most importantly the goal for today’s generation is to have a healthy retirement corpus. Stick to Equity mutual funds for goals which are more than 5 years away.
Markets keep going up and down and thus don’t try to time the market otherwise like all investors, you won’t be able to escape unscathed.
While looking at a fund's performance, do not be led by the fund's return in isolation. A scheme may have generated 8 percent annualized return in the last 24 months, but then, even the market indices would be strolling around that figure. Under-performance in a falling market, i.e. when the NAV of the fund falls more than its benchmark (or the market), could still be a reason to review your investment.
Therefore, compare the scheme's return as against its benchmark return. A scheme not being able to beat its benchmark on a consistent basis need not be in one's portfolio. If there are consistent under-performers, replace them with front runners after carefully evaluating the new buys. Importantly, identifying under- and over-performers need a longer time horizon.
Considering category average returns in case of mid-cap and multi-cap funds could be more effective than large-cap funds as the universe of stocks is large in the former.
The “chasing performance” mentality is the biggest risk for an investor. When we monitor frequently and buy best performing fund and sell under-performing fund, we’re putting ourselves in a lot of trouble. The winners of today may not continue with the winning streak year after year. Therefore, decisions based on reviewing may not be fruitful always.
The downside to avoid is to sell your portfolio based on one or two years of under-performance. Remember that The reason why most mutual funds usually provide greater returns over time than guaranteed investments is because of the risk premium rewarded to investors. This premium comes in the form of higher returns associated with accepting market risk, which is the risk of losing some portion or the entire original amount invested.
Asset allocation is an important part of your investment strategy. You might be holding bonds, stocks, bullion, real estate, etc. Exiting from equity-based MF schemes may disrupt the overall portfolio allocation. Try to maintain the original levels unless allocation needs a change. The proceeds may have to be deployed in another instrument or scheme but as said above “chasing performance” isn’t a great idea and should be avoided.
Constant review and tracking of fund returns may push you into taking impulsive decisions. Keep a calendar of review to be done and stick to it. When there are market falls, at best, see if you can plough more, and do so. Do not let a single month or quarterly fall in NAV push you into stopping SIPs or exiting a fund.
Reviewing of the EMF portfolio doesn't merely help you rejig schemes in terms of performance but may also throw up surprises. You may be holding a too little or too much-diversified portfolio. Even the expense ratio of some of the schemes that you could be holding may be high compared to others within the same category. Most importantly, the review helps you validate if the investments are aligned to your goals. So, get a review process in place and reap its benefits before the next big market wave.
With gold and shares being the most sought after Investing arena for investors, how can a beginner invest in shares?Read More
That depends on a whole bunch of things, like when you start investing, what you decide to invest in, and when you decide to retire.Read More