5 Top Strategies for Beginners Looking to Invest in Mutual Funds

Modern investors, both young and old, are turning to mutual funds to grow their wealth. This makes sense, considering that this instrument offers you many benefits. For one, you can start investing with as little as ₹500, and contribute consistently every month.

Moreover, mutual funds are some of the best ways to diversify your portfolio across asset types, be it debt instruments, gold, stocks, etc.

One of the main benefits of investing in mutual funds is that there is no need to open a Demat or a trading account. An Asset Management Company (AMC) manages the fund with expert professionals called fund managers, and you need only invest.

These fund managers do all the investing, handpicking assets like corporate bonds, hybrid instruments, equities and money market instruments based on the strategy. However, as a novice investor, you may have some doubts. A well-planned strategy helps dispel such doubts and enables you to confidently work toward your financial goals.

To that end, here are 5 top investing strategies for beginners looking to invest in mutual funds.

Have defined goals

Before investing your hard-earned money, be clear about your financial goals. You need to know how much you plan to invest, the investment horizon, and your risk appetite. These contribute to drafting up a well-demarcated goal, as investing in mutual funds is better over the long term.

So, before you choose the funds you wish to invest in, have a clear understanding of your goals. If you have a short-term goal, wherein you need the returns in 2-4 years, you may have to explore riskier mutual funds, as these often have the potential to deliver higher returns.

On the other hand, if you are investing for the long haul and have a low risk appetite, it would be better to explore risk-adjusted instruments. These often have a proven track record of generating returns over 5-7 years or higher. 

Build a diversified portfolio

While you can invest in mutual funds across various sectors, diversifying your portfolio is a smart approach to generating potential returns. As a beginner, this may seem overwhelming, but you can always get assistance in picking funds that suit your profile.

Diversification simply means picking mutual funds that invest in a variety of asset types. For instance, if you are a risk-averse investor and prefer stability, debt funds are the go-to choice. However, by diversifying, you can also divert 10% of your investing corpus to the riskier equity funds and tap into the potential of a different asset class safely.

All this strategy does is provide you with flexibility, allowing you to earn lucrative returns across asset types. It also aids in building a robust portfolio that helps you mitigate losses and maintain a constant portfolio value. So, even when one fund underperforms, you have other funds making up for the loss.

Choose SIPs rather than investing in a lump sum

As a beginner to mutual fund investments, opting for Systematic Investment Plans (SIPs) is a safer approach. This mode of investing is a better option for two reasons. First, SIPs allow you to start your investment with a small amount of ₹500, paid regularly over a specific timeline.

Secondly, you do not have to time the market with SIPs, but you would if you were to invest via the lump-sum mode. This is why lump-sum investments are generally better suited for seasoned investors, capable of getting into the market at favourable windows.

Furthermore, SIPs are safe and allow you to build the habit of investing. Saving to build a corpus, especially as a beginner, can be challenging. However, making set contributions every month is much easier and more feasible.

Understand the right time to exit a mutual fund

Whether you are a seasoned investor or a beginner, it is crucial for you to assess the time when you need to exit a fund. As a beginner, this may seem daunting, but the AMC that you choose to invest with will have the ideal recommendations.

Remember, mutual funds are managed by proficient fund managers, and they are adept at handling market swings. You can always get professional help to understand when to exit, and most AMCs will offer such recommendations.

However, it is best to stay the course as much as possible and continue investing for the entire period that you commit to. If you have set a period of 4 to 5 years, stay consistent all through and exit only at the end.

Learn about the tax benefits

You enjoy tax benefits when you invest in a mutual fund, and these vary based on the holding period and the asset class. One such tax-saving mutual fund is the Equity Linked Savings Scheme, which provides you with an exemption on your taxable income but only if you stay remain invested for at least 3 years. Also, before investing in mutual funds, understand tax laws related to short-term capital gains tax and long-term capital gains tax.

While mutual fund investments can help you generate returns effortlessly, choosing the right fund house plays a critical role. With simplified KYC documentation and several other benefits, getting started in mutual fund investments with the Bajaj Markets App is a simple way to get going. Download the app from the Google Play Store or the App Store and start building your wealth today!