In order to procure a protected financial future, it is very important for you to start saving and start that early. If you are an individual who is browsing through the investment avenues and have opted for Mutual Funds then you have made a very good decision. The Systematic Investment Plan (SIP) is the all important route you need to adopt in order to secure your finances up to a certain degree. But there are certain things you need to keep in mind while you proceed further.
Mutual funds are subjected to a risk due to an expected fall in the net asset value of your investment. While these risks are caused due to several external factors such as government policies, inflation, and interest rates, internal factors such as management woes, labor differences, and technology issues can also contribute negatively to the behavior of mutual funds. While mutual funds use diversification as a tool to fight against the volatility of the market, this does not help remove market risks as a whole. In order to analyze the risk profile of a mutual fund, it is important to comprehend the following methods:
Standard Deviation and Variance
Standard deviation is a tool which helps measure the total risk that is associated with a fund. It helps to measure the extent to which the fund’s returns vary across its average returns. These returns can be calculated by a change in the percentage of the net asset value, which can be calculated over different time frames varying from daily, weekly, monthly, quarterly, or annual periods. If the standard deviation is high, then it signifies that your periodic returns are undergoing fluctuation, thereby signifying risks involved in the investment. Low standard deviation indicates that your periodic returns are undergoing fluctuations that are closer to the expected average returns, thereby implying a lower probability of loss on your investments.
Variance on the other hand is used a tool to measure dispersion in your returns, around the average expected returns from your fund. It is calculated by considering the square units of measurement.
R-squares and Beta
R-square is a tool that helps explain the extent of change involved in the net asset value of a fund, with a change in its benchmark, with a value that varies between 0 and 1.
Beta is used to measure the systematic risk involved in the market, with respect to the benchmark of the fund. Funds that have a beta which is higher than 1 are considered to be highly volatile, while those funds with beta lesser than 1, have a less likelihood to perform in a volatile manner. In order to make the calculation of beta reliable, it is important to accompany it with a high R-square value.
If you manage to ponder into the efficiency of the tools mentioned above, you can avert yourself from an unforeseen circumstance that can occur, regardless your careful planning. There will be no use of your planned investments if you lose out on your investments. Opting for debts like personal loans, home loans etc., may be the last resort for you in order to raise finances for your financial requirements. Repaying EMIs which carry high interest rates is not a very likable thought as it can burden your finances for a long time.
Reviewing your portfolio at least on a yearly basis is also important as it can help you understand the particular fund in which you have invested is trending. However, any changes that you wish to make should only be done only if the fund underperforms consistently or has deviated from its fundamentals. But in most cases, any downward movement remains only for the time being, and does not last for a long time. If you have invested for a long term, such deviations are likely to be corrected in due course of time.