Mutual Fund investment is gaining popularity nowadays as it provides a great opportunity for investors to diversify their investments across various asset classes and earn good returns by getting their investments managed by highly efficient fund managers.
Though you may feel that you know everything about Mutual Fund investments, there could be some very important aspects that you may not have come across earlier. These may help in making your Mutual Fund investments more effective.
Let’s now take a look at four such important things about Mutual Funds:
Excessive Diversification Does Not Mean More Profit
Excessive diversification usually makes it difficult for investors to track their portfolio. Some people think that by excessive diversification they can make more profit or reduce the risk. But actually, it invites lots of confusion while managing so many investments.
Putting money in lots of funds often leads to repetition, such as multiple investments in the large cap fund, too many investments in small cap fund, etc. Ideally, you should invest in a manageable number of funds that allow diversification across the fund, within the fund and as per your financial goal.
No Penalty On Temporary Suspension Of SIP
There is a misconception among a lot of investors that if SIP is suspended before committed tenure, then it may lead to a penalty by the Mutual Fund companies. But, in reality, Mutual Fund companies do not penalise for suspending or discontinuing of SIP. However, if a Mutual Fund company sends a debit request to the bank, and you do not maintain the required balance for payment, then the bank may penalise you in this case.
Mutual Fund AMCs allow you to pause the SIP temporarily. So, if you want to temporarily stop the SIP, then request for a pause to AMC. Try to maintain the requisite amount in your bank account to honour the debit request for SIP and avoid the penalty by the bank. If you are not sure about restarting the SIP, then request the AMC to stop it.
Schemes With High Ratings Don’t Always Earn Better
Should you invest based only on the high rating of a Mutual Fund scheme? The answer is no! You should conduct a thorough analysis of the scheme before investing in it.
You should conduct a thorough analysis of the scheme before investing in it. The higher rating of a scheme could be used as an indicator to sort out funds, but it should not be the sole criteria to invest your money in a specific high rated scheme. You must take into consideration the strength of the fund’s management, fund house reputation and ability, etc. As an investor, you should use fund rating as a sorting tool and conduct own due diligence before putting your money in a specific fund.
Mutual Funds Can Fetch Short-Term Profits As Well
A lot of people invest in a Mutual Fund for a long-term horizon. And for the short term, they rely more on the bank’s Fixed Deposits (FDs). But Mutual Funds provide a great opportunity for short-term investors as well. While investing for the long term, the main focus is to get the capital appreciation and people can take more risk for higher ROI. For short term, the focus of an investor is more on the safety of the fund. Tax on the short-term profit is a big factor that also influences the investment decision of the investors. For short term investment, you can explore opportunities in a liquid fund, short-term gilt fund, ultra short term fund etc. Such short term mutual fund
Tax on the short-term profit is a big factor that also influences the investment decision of investors. For short-term investments, you can explore opportunities in a Liquid Fund, short-term Gilt Fund, ultra short term fund, etc. Such short-term Mutual Fund schemes offer returns in the range of 6% to 8% p.a. (approximately). Liquid Funds allow you quick entry and exit without any penalty. So, if you are looking for short-term profit, then depending on your return expectation and risk appetite, you have many options available in Mutual Fund schemes.
Always conduct proper due diligence and analysis before you invest in a Mutual Fund scheme. Consult your investment advisor for selecting the appropriate scheme in sync with your short and long term financial goals.
(The writer is CEO, BankBazaar.com)