Investors who are barely a year into the market make a foray into investing in mutual funds. In spite of being an attractive field to invest there are some serious misconceptions pertaining to direct mutual fund investment. So before you start your investment journey you need to have a concise idea about mutual funds in a nut shell.
Let us get to the basics? What is the definition of mutual funds? Some people confuse it with stocks. They are eager to know what the anticipated returns are in a year or two. Others feel that it is more or less like a bank deposit where you can avail attractive return rates with each passing quarter.
Consider mutual funds in the form of an investment vehicle. Just invest a small amount of money in a mutual fund scheme as it is possible to start off with a nominal sum. There are various varieties of mutual funds; some of them are available in equities whereas others invest in stocks. Even gold and international schemes are there in the market. For a young investor it is suggested to invest in hybrid or debt schemes.
The investment goal, time horizon and risk profile outlines the choice of your schemes. For example if you are planning to invest for 3 years in order to buy a bike. So the choice has to be a debt related scheme as a short term debt fund could be ideal for them. Even if you are planning to invest for a day or two overnight schemes would be an ideal option. But short duration funds are an attractive option as you can invest for a year or two.
In case if you are interested to know more about mutual funds there is a lot of promotional material available on the internet to guide you further on this.
Let us now take our attention to equity based mutual funds. For someone looking to investing in stocks there is an ideal choice. For example, if it invests in large caped funds it is referred to as large sized caps. The investment scheme does go on to have a considerable impact on the risk element associated with it. At the same time the higher risks of these schemes more returns you can expect. But do not fall into the trap of choosing a fund on the basis of its return only. Opt for a scheme that matches with your risk appetite, otherwise during the testing times it would be very difficult for you to continue.
Most messages that we receive from the younger group fall under this domain. Many of them go on to choose a scheme just because it tops the chart and this is a mistake they need to avoid. They figure out that during market downturn the scheme has fallen flat. Now they do they homework and choose a scheme with a higher risk and that is prone to considerable volatility. But it is too late as they have fallen into the trap.
