5 things young investors should know before investing in mutual funds

Navneet DubeyMoneycontrol News

Investing in mutual funds is the best option for those who want to take advantage of capital market investing to create wealth. The earlier you start, the better since the chances of you riding out equity market cycles to create wealth is high. Young investors in their 20s or 30s can take the benefit of rolling returns while investing money for a longer period of time in mutual fund schemes.

Here are 5 things which a young investor should keep in mind before investing in mutual fund schemes:

 Define a purpose

If one wants to gain from mutual funds then they should invest with a definite purpose. For example, invest money towards a financial goal like wedding planning, child education, retirement or overseas vacation. This will help them in making dedicated savings for their long-term financial goals.

 Holding duration

As a young investor one should know the holding duration of any MF categories (for e.g., liquid funds, debt funds, equity funds, hybrid funds, etc.) while investing their money in mutual funds against any financial goal.

Every category of funds have their own risk associated with them as per their holding period, where failing to invest as per the benchmarked time horizon, one may lose money instead of making good returns. Therefore, one should keep few things in mind to make a good amount of wealth in long run.

“As equities generally outperform other asset classes over the long term (more than 3 years), the risk of capital erosion in equity funds reduces to negligible amount for investment horizons of over 3 years. Moreover, the major structural reforms undertaken by the government in the last few years, increased public investment in physical infrastructure, low inflation and stable currency should start bearing fruits by 2020-22. These would start reflecting in your mutual fund earnings too in three years from now,” Manish Kothari – Head of Mutual Funds, told Moneycontrol.

 Benefits of SIP

There are two ways to invest your money in mutual funds. It can be through lump-sum mode where you need to invest your money in one go and requires timing of market or else, go for an SIP mode where you can invest your money on the weekly, monthly or quarterly basis as per your choice.  Most advisors say the SIP route of investing is the best. Doing a SIP does not require timing of market and also helps in doing investments in a disciplined manner which overall becomes less risky for young investors to start their investments towards long term financial goals. While investing in equity mutual funds one should invest their money for a longer term. It means that your financial goals should have a long term horizon, say for about 5 to 7 years.

 Power of Compounding

Young investors have an advantage in investing since the longer you stay in the market, the less risky your investment becomes and the more corpus you can generate over a period of time. This happens because of the compounding effect and the rupee cost averaging benefit you get over a long term.

“Compounding interest yields better results when money is saved over longer durations. If you set aside a sum of say Rs 5000 every month from the age of 25, at a return interest rate of 10%, when you turn 60 years you will have with you funds worth about Rs 1 crore or more. However, if you start at 40 with the same amount and return rate of interest, the retirement fund will amount to only around Rs 33 lakh,” says Ajit Narasimhan, Category Head – Savings & Investment,

Market risks exist

As far as safety is concerned, mutual funds can be considered as a safe investment avenue only in terms that they are regulated by SEBI (Securities and Exchange Board of India). And each company needs to maintain a minimum net worth to set up an AMC. However, the investment made in any of the schemes are subjected to market risk. You should always have clarity about the scheme that you are investing in by reading the offer document before making any investments.

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