4 Basic Mutual Fund Investment Rules

Understand the Risks

All Mutual Funds carry risks in some form or the other. Make sure you understand them before investing. Some categories of mutual fund investments will carry higher risks than others, and will have the scope to deliver higher long term returns in exchange. For instance, banking sector funds have delivered negative returns in the recent past owing to the unearthing of the PSU bank scams. However, such a fund would also have the potential to rebound faster than lower risk, diversified equity funds in case the sector were to start undergoing long term reforms. What matters is that the risks should be well understood by you and acceptable to you.

Don’t “Churn & Burn”

You’ll not achieve much by constantly moving in and out of funds. Once you’re zeroed in upon an investment strategy, you need to give your investments time to start delivering. Don’t expect mutual fund investments to begin giving you return from the day that you invest. Remember, mutual fund investments are linked to debt and equity markets, and so will fluctuate wildly in the short term. Over longer time frames, returns will be smoothed out. Constantly succumbing to impatience and churning in and out of funds will only end up hampering your returns.

Don’t be Blindsided by Past Returns

A little bit of knowledge is a dangerous thing – and this applies to mutual fund investments too. Typically, retail investors log into a mutual fund investment website, and search for funds that have delivered handsome returns in the past year. However, this is a strategy that’s unlikely to pay off, because this is akin to buying an asset after it has gone up in price! It’s best to consult with a seasoned Financial Advisor in order to select the funds that are best suited to your risk tolerance, liquidity constraints and financial goals.

Follow Asset Allocation

Every asset class doesn’t deliver great returns in every time frame. There are times when equity will outperform, and there are other times when debt and gold-oriented funds will outshine others. For this reason, its important to follow a predefined asset allocation strategy and stick to it resolutely through a disciplined annual rebalancing process that should ideally bring your portfolio back to your target asset allocation. Don’t let your emotions come in the way of your asset allocation strategy, though. Follow facts and common sense instead.