Considered less risky than direct stock investing, mutual funds are a popular investment instrument. In a mutual fund, each investor owns a portion of the fund equivalent to the amount he or she invested. Mutual funds pool in money and invest these across various assets to earn returns. Each MF is managed by a fund portfolio manager.
There are different kinds of MF schemes available depending on the investment goal, strategy as well as the risk exposure. It thus appeals to a wide variety of investors.
While investing in mutual funds, the investor needs to be cautious. Here are some dos and don’ts to be kept in mind:
Do’s:
• Insist on getting a copy of the offer document from the fund that you are investing in.
• Read the offer document carefully before investing. Know the financial goals set by the mutual fund scheme you are investing it and whether those goals match your aspirations or not.
• Invest according to the risk that you can handle financially. Balance them with the financial goals you have set out to achieve.
• Be aware that your investment in mutual funds is subject to market risk. It would not be immune to the happenings of the market.
• Remember, the past performance of the mutual fund is not indicative of its future performances. The performance of a mutual fund depends upon how the markets function in real time.
• Invest in a fund, which diversifies its portfolio with different asset holdings rather than being focused on a single portfolio. Ensure the fund diversifies the holdings in your own portfolio. For example, if you hold shares of IT companies, ensure you invest in a fund that does not invest in IT companies.
• Keep yourself updated
Don’ts:
• Do not invest in a scheme just because somebody is offering you a commission or incentives. This also applies to recommendations from friends and relatives.
• Do not fall prey to promises of high returns. Also, do not get carried away by the reputation of the Mutual Fund house or scheme.
• Do not hesitate in approaching the respective authorities in case of any queries or any problems regarding your investments in a mutual fund. During such times, it helps to know your rights as a unit-holder.
• Do not deal or invest via an agent/broker, who is not registered with the Association of Mutual Funds in India (AMFI). Otherwise, they are not registered with the SEBI and are regulated. The market regulator oversees their actions to ensure ethical and healthy standards are maintained, while promoting the interests of the mutual funds and their investors.