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5 things to understand while investing your hard earned money in mutual funds
When you invest in an equity mutual fund there is no impact on tax immediately unless there is a deduction to be claimed.
Mutual funds are an easy route to invest and the inflows into the industry have been rising continuously. However, it important to understand that simply investing money without knowing the implications can actually have an adverse effect on your invested amount.
Therefore, whenever you invest in mutual funds, you should always try and understand a few basic things about investing through this route.
You must have heard that high returns come with high risk. While that’s true, what’s important is to not take this hypothesis literally. The risk is a very subjective variable. What’s high risk to you can be low or no risk to others?. Ajit Narasimhan, Chief Marketing Officer, Sundaram Mutual said that before getting into any investment, your first step has got to be to assess your appetite for risk. One common risk test is to assess your ability to accept a negative return. If you can absorb negative return, the interpretation is that you’re willing to invest in high-risk assets. However, at times risk analysis is a bit more complex than just that. Looking at your holistic financial health is the most important step.
Assess your liquidity, your liability, milestones, goals, sources of income, your age, job stability, years to retirement, biological health and insurance cover. These are some variables to determine your risk taking capacity.
Assessing your risk taking capacity appropriately will help you extract maximum value out of your investment. After all, any investment deserves time to deliver its true value,
Most mutual fund schemes have two to three investment options built in. These options are typically Growth, Dividend Pay-out and Dividend Re-investment.
These are useful to investors and investors should take time to understand the merits/demerits of each option before picking one option. Narasimhan said the growth option is the preferred option as it’s the best representation of Wealth Creation.
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