How to invest in mutual funds?
When an average salaried person decides to save, the first thing they need to keep in mind is the fact that a 100 rupees saved today sadly will not have the same purchasing power tomorrow. This is due to the economic phenomenon known as 'inflation'.
You will have experienced inflation from the changes in prices of the daily goods we buy, the tuition fee we pay for our children, and the medical bills we pay for ourselves and our loved ones. What was worth Rs. 50 a year ago, may today be worth Rs. 100.
This means that simply saving money will do you more harm than good.
To counter the impact of inflation, your savings will need to grow at a rate that is either equal to or higher than the general increase in prices in the economy.Should I Invest in mutual funds?
We may understand the benefits of investing in a mutual fund as compared to investing on our own by looking at this simple example:
Consider driving yourself every day to work and coming back in your own private car. Commuting in your own car gives you the flexibility to decide when to travel, what stops to make and what route to take. However, on the downside you would have to constantly think about taking the shortest and best route, wrestle through the traffic, endure stress, pay the extra amount for fuel consumption, and forego the work you could do if you were not driving.On the other hand, if you were to travel in a public bus, you would just have to buy a ticket and board the bus. Once you are in the bus, the experienced driver, in our case the fund manager, would do all the hard work for you, and while commuting on the bus you could work on other tasks and save on the extra costs when travelling solo in your own car.
A mutual fund offers the same ease as the public bus has over the private car. You may invest and see your investments grow over the years.
It is a collective investment scheme in that a lot of people contribute their savings to a central fund. A professional and experienced fund manager can assess the situation and invest your money in a variety of investment options.
- Risk Factor
- Asset Allocation
Having a built up portfolio of assets is all well and good, but managing a large portfolio is easier said than done, and often takes up significant chunks of time.
Asset managers and asset management companies help their clients manage their portfolios and make investment decisions based on extensive research. Here are some of the factors to consider when choosing an asset manager:Research the Company
With any asset manager, the first thing you should check is their credentials. This will determine whether they are legitimate, and give you an insight into their experience and what they can do for your investment portfolio.
Asset management firms usually have numerous advisers who may specialize in different fields of investment, so it is worth seeing what the firm’s capabilities are and how they may cater to your specific requirements as an investor. It is also important to know exactly how they operate and go about investing your capital.History/Regulation
Another consideration is how well established the asset manager is, and what their history of asset management looks like. Looking at their past successes (or failures) is a good way of determining whether they will work for you. If they are currently managing assets for thousands of clients and have good testimonials on their site, then the chances are they are an effective and trustworthy firm.Price
Obviously, the most important factor for many investors when choosing an asset manager is the cost of the service. This can vary greatly between companies, and depends on which services you intend to use.
It is often the case that larger asset management companies, which manage billions or even trillions of worth of assets, can offer cheaper prices whilst still remaining very profitable. That being said, there are still smaller firms which may be just as effective in meeting your requirements, if not more so. You may also get more personal, in depth experience with a smaller firm. Comparing the price of different wealth managers and listing them will go a long way in helping you determine which one to choose.
Whenever choosing an asset manager, be very thorough in your research, and do not hesitate to contact them to find out further details about their service. Once you have managed to decide which one you would like to manage your assets/investments, you should review them regularly and make sure they are fulfilling your long term investment goals.Picking the right fund
Your plan must be based on investment objectives and risk appetite.
For example, if you want to save for a car (or place your savings in a fund that is easily accessible at any given point in time), then you should invest in a cash fund.
However, if you are looking to invest for your child’s college education or are looking for long-term savings, a balanced fund (where investments are balanced between stocks and other assets e.g. bonds), or an equity fund (stock market focused).
Capital preservation funds on the other hand provide the best of both these worlds. They allow you to access your investment when required.