Staggering one’s investment through SIP helps one to stay disciplined and avoid temptations to book profits based on market conditions
With the stock market indices around new highs, the participation of new investors is expected to go up in the coming days. While the simple formula to make money in the stock market remains the same – buy low, sell high, it is easier said than done. There are investors who prefer to play the waiting game and wait for the market to fall so that they are able to buy low. At times, the market keeps rising and the opportunity gets lost. But, all this is generally followed by those who have a short-term view of the market or are investing without a plan.
For a retail investor, routing savings through equity mutual funds suits the most, especially when the goals are long-term in nature. For long-term equity mutual fund investors, any time to invest is the right time, provided they buy the right MF scheme and have a diversified portfolio. Here are some tips to make the investing journey fruitful for equity MF investors.
1. Link investments to goal
If you are a first-time investor pore relatively new, have a plan in place before you start investing. How much per month will you invest and towards which goals, should be clear in your mind. The amount that you wish to save should be inflation-adjusted so as to avoid under-investing.
You may start saving separately towards your goals that could be home buying in 3-5 years, children education in 15-18 years or even your own retirement almost 30 years away.
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2. Portfolio construction
As a beginner in mutual funds, make your first investment in Index Funds. They track the underlying index and are less volatile than any other equity fund. Choose 2-3 schemes forming the core of the MF portfolio. Add mid-cap and small-cap depending on your risk profile and goal horizon. Avoid thematic or sector funds unless you can track them especially in terms of government policies impacting them.
Opt for consistently performing MF schemes that have generated benchmark-beating returns over the long term. Do not merely look at the fund’s especially sectoral fund’s short-term performance to decide.
Understand the scheme’s objective, have a close look at least at the scheme’s ‘Fact Sheet’ to see the portfolio structure – in terms of market cap, allocation to top 5 industries and top 5 stocks, as returns are largely going to flow from these factors. This approach will also help you diversify your MF portfolio.
3. Systematic Investment Plans (SIP)
A better approach could be through Systematic Investment Plans (SIP) where a fixed amount gets debited from your bank account towards MF scheme each month. Further, you may deploy any lump sum preferably into the same MF folio as and when a surplus is there. Staggering one’s investment through SIP helps one to stay disciplined, avoid temptations to book profits or delay making investments based on market conditions.
Till the goals are at least three years away, keep funds in equity-oriented schemes. Thereafter, start shifting funds from equities to less volatile debt funds in order to preserve the corpus to meet the goal.
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4. Review regularly
Other than the Index fund, which is a passive fund, you may have to review the performance of the MF schemes in your portfolio. The active funds where the performance depends on the acumen of the fund manager, among other factors, need a regular review. Check their performance against peers, benchmark and category returns, and take appropriate action.
5. Regular plans or direct plans
Every MF scheme will have two options – A regular plan and a Direct plan. The difference is in terms of lower cost (expense ratio) for Direct plans as they are to be invested directly without the help of any MF distributor. Over a longer horizon, Direct plan helps to save a sizeable chunk of money. However, the selection of MF scheme is the key to maximize the benefit of the Direct plan and thus may not suit all new investors.
Making a beginning
For a new investor in a mutual fund, it is important to give time to your investments. Some of the active funds may outperform the market while others may not. Stay with consistent performers only while selecting the funds and do not merely look at their short-term performance. There could be a significant dip in your fund value as we all saw in March 2020. Those investors who opted to stay and not exit benefited in the long term. Finally, remember to make use of the fall in the market and invest more during such corrections. It takes time for the results to show as equities tend to drift upwards in the long term.
