Factor in these while investing in Equity Mutual Funds
Mutual Funds are increasingly becoming more and more preferred investment vehicles for many Indians to create wealth. According to a report, The total Assets Under Management (AUM) of the Indian Mutual Fund Industry is close to ₹ 38000 crores.
If your investments align with your financial goals, then you have a better chance of meeting your financial objective. That said, you have to keep in mind a few factors while investing
- Investment Goal
- Your Investment Horizon
- Risk Appetite
People invest their hard-earned money for a variety of reasons – creating a corpus for the future, managing their child’s education, downpayment for buying a home. There are several benefits of aligning your investments with financial goals
- It instills a discipline to save regularly
- A clearly defined financial plan would help you estimate the corpus you require for the future
- By taking stock of these factors, you can exactly take a call on the right scheme (Short end, long cap, midcap)
Knowing your investment horizon certainly helps you in determining the type of fund that you want to invest in. For example, if you are planning to build a retirement corpus, it is obvious that it will be a long-term investment timeframe. In that case, it is better to go for a large-cap fund with a longer investment horizon.
Though people may be skeptical about the volatility of equity markets, short-term volatility has little impact on the potential long-term returns. According to a study, long-term investment returns (say 10 years) are comparatively less volatile than short-term investment returns. Equity markets despite being volatile do recover and fetch you returns when invested over a long-term duration.
Risk Appetite and Risk Tolerance
There are two aspects to Risk Appetite – Risk Capacity and Risk Tolerance. Risk Capacity is your ability to take risks which in turn depends on your age, your current financial position, and various other factors. You can take more risks when you are younger as you have a long working life ahead of you. Also, the risk capacity for long-term investments is high as your investments can easily recover after suffering short-term volatility.
Risk Tolerance on the other hand is entirely dependent on an individual. Some investors are risk-averse naturally, so they would be skeptical about investing in large-cap equity funds. On the other hand, some are daredevils by nature, and they are not scared about risk. Past experiences also come into play. An experienced investor who has seen the bull and bear of the market can take a prudent call on where to invest and how much to invest,
Therefore, it is essential to keep both these factors into consideration before taking a call to invest. For example, a smallcap fund is relatively more volatile than a large-cap and midcap fund. You must factor in your risk appetite and ROI before taking zeroing in on the fund.
It is always better to have a diversified portfolio as the returns from one fund can make up for the shortcoming of the other. The general thumb rule of investing is that you must invest at least 70-80% of your funds in a large-cap and the balance in mid-cap and small-cap for better returns.