New investors are in the belief that they should diversify their investments first and then consider the funds’ performance. This approach is quite wrong. Not many times does an investor benefit from such a decision.
Targeting tax saving funds is not a great idea. It is good to have one fund which provides you tax benefits, however, having more than one can cause serious hindrances in the growth of your portfolio. Sunil, 38, business man, started investing in funds which belonged to the large- and mid-cap fund and a mid- and small-cap fund; all of which belonged to the tax savings fund basket. Apart from this he incorporated a sector special fund, which looks forward towards investing in developing sectors in India like infrastructure, power etc.
The sectoral fund is highly volatile due to which your investments can never be secured. Another major drawback is that it has a narrow investment mandate as it is specific to only one sector, not giving you the ability or the advantage or the possibility to help increase your returns. Tax planning funds, unless carefully selected has the same disadvantage.
There are a lot of things you need to keep in mind before opting for a fund. The first and the most important thing, is to analyze what are your goals and the duration of your investments. Once that is done, make sure you research on all the available funds the market has to offer depending upon the same timeline. The best way by which you can analyze the successful functioning of a fund is to check how that particular fund has managed to fare under various market phases: both bull and bear phases. This will give you the confidence as to how your particular fund would react and what is the degree up to which your investments will be safe. Although, this can be one of the factors to determine a fund’s performance, it should not be completely relied upon.
Once you create your portfolio, it is always better to reassess and revalue them at least once in a year so that you know how far your investments have grown in order to meet your goals. Most times people are subjected to emotional decision making, which at times can be irrational. Investors tend to become greedy when markets ride high and tend to push their investments to risky corners. Getting into a debt of a loan or a personal loan etc is not a plausible proposition you might want to get yourself into. Make sure that your goals are at par with the maturity period of your investments. Since, most investments have a definite lock in period under which you will not have access to the amount until the fund becomes mature, fix the tenor wisely.
In case of emergencies, these can create huge hindrances. So, make sure you reassess your portfolio, at least once in a year so as to realign your financial requirements appropriately. Another important factor you need to bear in mind is that, it is always better to park liquid funds. In emergencies like accidents or urgent money requirements, it is difficult to break debt funds or funds that have a specific lock in period. To break them involves a lot of procedural work, moreover, it is a time consuming process, which you might seriously lack. Park some liquid funds in Savings Bank account where the money doesn’t lie idle but also increase with the interest rate provided on them.
Summarizing, time your investments depending on the fact as to when you will be requiring those funds to finance your requirements.