Handy Tips on Mutual Fund Investment for Young Investors

If you are young and hungry for investing, congratulations, your hunger is taking you in the right direction of life. Financial planning and saving are essential for anyone wishing to start investing, irrespective of their age. Financial planning teaches you to manage your money and this leads you to limit your expenses only to your needs. People often confuse between needs and wants and generally pull the latter in their list of needs. Financial planning teaches you to focus on your needs i.e. your short term and long term financial goals. Having a defined set of goals might help young investors set on the right path of their investment journey. Yes, investing is a journey, it is a long process that requires systematic investing and commitment.

The best part about starting investing at a young age is that time is your best friend. You may also be able to take adjusted risk in order to seek some capital appreciation in the long run. This leads us to the next step of financial planning which is determining your appetite for risk. The risk appetite of an investor is nothing but their ability to take calculated risks with their finances with the hope that it may fetch them some capital appreciation at some point of time in future. If you are someone who is young, aggressive and keen on investing in market linked schemes, then you may consider investing in mutual funds.

Mutual fund are an investment vehicle for pooling funds from investors sharing a common investment objective. Several investors are considering investing in mutual funds as they are considered to carry a diversified portfolio. Mutual funds also offer active risk management which is much needed in volatile markets.

Mutual funds are a pool of professionally managed funds, which is why even those who lack in depth knowledge about financial markets generally may consider investing in them. Mutual funds are managed by experienced fund managers, who buy/sell securities in accordance with the scheme’s investment objective.

If you too are keen on becoming a young mutual fund investor, here are some tips that might come in hand in your investment journey:

Determine your investment goals

Ask yourself, “What is it that I want to achieve through these investments?” Yes, it is necessary for investors to ask the right questions if they want to climb the ladder of financial success. When you have defined a set of goals, investment planning too might become easier. If you are investing in mutual funds to save taxes, a scheme like ELSS can help you bring down your tax liability and might offer some long term capital appreciation at the same time. On the other hand, if your goal is to build a fund to take care of expenses in case of an emergency, investing in a liquid fund might work in your favour. Hence, determine your goals before making an investment decision.

Understand your risk appetite

When you invest in mutual funds, you expose your finances to the market’s volatile nature. Investments made in mutual funds are exposed to market vagaries and hence, returns from such investments are never guaranteed. Hence, investors are expected to determine their risk appetite before putting their hard earned money in any type of investment scheme. There are several schemes in the market that may seem similar but carry different traits. So make sure that you invest in the right scheme.

Diversify your investment portfolio

An important tip for all young investors, do not keep all your eggs in one basket. Depending on your risk appetite, diversify your mutual fund portfolio with equity and debt instruments. This way you will balance the risk of your overall portfolio. Also if one asset class underperforms, it is less likely that the other asset classes will underperform at the same time in tandem. Hence, always diversify your mutual fund portfolio as it also balances risk.

Consider starting a SIP

A Systematic Investment Plan is one of the methods to make an investment in mutual funds. Several people confuse SIP with mutual funds. That’s because these two terms have become so synonymous that people think that mutual funds and SIPs are one and the same thing. Mutual fund investors have two investment options. They can either make a lump sum investment right at the beginning of the investment cycle or start a mutual fund SIP. SIP allows investors to invest small amounts at periodic intervals in the mutual fund. One does not need a large capital in hand to start a mutual fund SIP. They can start with a small investment amount and gradually increase the SIP amount. If you start early investments in mutual funds via SIP and remain invested in the long run, you might benefit from the power of compounding.

If you find these tips useful, do share them with fellow young investors too. Also, if you feel that you need further assistance, do consult a financial advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.