Most people are aware of exactly what is mutual fund. It is a financial instrument that pools money from several investors and invests the pooled resources into the market.
No matter what your financial goal is, there is a mutual fund to suit your needs. However, the question that plagues most people is how to invest in mutual funds. If you too are unclear about it, here is a step by step guide on how to invest in mutual funds.
Step 1: Evaluate Your Financial Needs
You should decide how much capital you will invest keeping in mind your financial goals. There may be several short-term and long-term goals. Also, consider the period for which you intend to remain invested and your willingness to take risks.
Step 2: Research
Once you have the answers to the questions above, the next step is to pick a fund. To do this, see which categories of mutual funds complement your goals. Once you identify a category, select 5-6 best performing funds from it. Then study these funds in detail and pick the best one.
Step 3: Diversify
With mutual funds, you can invest either in stocks or in bonds. It is essential that you select a combination of equity and debt so that you don’t put all your eggs in one basket. This approach also reduces the risk profile of your investment.
Step 3: Make Room for Inflation
The money you invest now will decrease in value when you will ultimately redeem it. Therefore, when you are deciding on a capital for investment, make sure you keep enough provisions to combat inflation so the value of your money remains useful in the future. Money market mutual funds assure you the protection of your capital against inflation.
Step 4: Let Your Age Decide
It is wise to let your age determine the combination of debt and equities in your portfolio. Equities are high-risk options but the risks are averaged out for long-term investments. Therefore, younger investors can reap the benefits of higher returns through a larger share of equities in their portfolio. However, if your retirement is near, it is best not to venture in risks and invest in debt funds.
Step 5: Listen To Your Gut Instinct
When deciding the type of securities to include in your portfolio, do not take risks you are not comfortable with. Only go for risks you can handle.
Investing in mutual funds open you up to a range of benefits that include wealth multiplication and tax saving. Although selecting the correct mutual fund to invest in may be a challenging decision, identifying your goals and tolerance of risk simplifies the process considerably. With the correct approach and adequate diversification, you will be able to reap the benefits of a fruitful investment that secures your retirement plans along with your immediate financial goals.
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