Some people may ace their tests, get great jobs and do everything else expected of an adult – but they still need hand-holding, when it comes to stock market investing.
One of the biggest mysteries for a lot of learned people across the ages – is the stock market. Many people have struggled to invest and get good returns, despite being regular investors and market followers. It is in this context that people struggle to understand the benefits of investing in Mutual Funds.
Understanding Mutual Funds has always been one of the biggest challenges faced by retail investors, despite the large amount of value that they have created in the last few decades.
Investing in mutual funds is very important for many investors in India. These funds have become quite popular as they diversify the risks by investing in multiple equities. Building and managing your own portfolio via mutual funds is one of the safest way to multiply your investments.
An investor first needs to be clear about the life and financial goals that he has in mind. By being clear about the targets he/ she has, one can easily make a clear road map for investing.
To invest, you need a diversified, asset-allocated portfolio. This allocation is based on your goal timeline, risk appetite, and other factors. This is, based on what you’re aiming for, .i.e. the equity-debt proportion which works best for you.
As markets move, your asset allocation proportion also changes. Your equity allocation could go up if markets rally for a long time, or it could go down when markets are correcting. Hence, you need to re-balance it to bring it back in line.
Building a mutual fund portfolio
Building a mutual fund portfolio is like building your house. Just like you choose designs, materials and other tools for your house, you need to choose and select every little detail for your portfolio. In order to maintain and build your own portfolio through mutual funds, you must have a plan along with a strong foundation of mutual funds which fits best according to your requirements.
First select a satellite portfolio design. A Satellite Portfolio Management is an investment strategy that incorporates traditional fixed-income and equity-based securities (index funds, passive mutual funds, etc). Next, focus on building a large capital stock fund which is the anchor of your portfolio with satellite funds at the periphery. The satellite funds form the smallest portion of the portfolio.
Other categories that can be included are fixed income funds, which includes bonds, sector funds, market funds, and small capital stocks. Before choosing your fund, you must have a strong idea about the amount of risk you can tolerate.
Lastly, you should be able to evaluate your asset allocation. Once you successfully evaluate your risk, you shall be able to evaluate your allocation of assets. These include the stocks, cash, bonds and other investment assets which are the part of your portfolio through mutual funds.
If your asset allocation is perfect, then your risk tolerance level is either aggressive; high-risk tolerance or moderate; medium risk tolerance.
Given that you have a broad range of mutual funds to choose from, you can simply get a fund screener to compare your performance and to a set a benchmark. More so, you would also want to evaluate crucial qualities of mutual funds like manager tenure and expenses incurred for the particular fund.
Additionally, a given mutual fund will definitely issue different classes of its shares to its investors. The most common variations of the share classes for load mutual funds are front-load A shares, back-end load B shares, and level-load C shares.
l Class A Shares: A mutual fund’s A Shares charge a front-end load at the time of purchase. This is a sales fee which is charged as a percentage of the total investment and is used to compensate the financial representative who sells the particular fund. The amount of the respective front-end load is then subtracted from the original investment.
l Class B Shares: B Shares are called back-end loads. When a particular investor purchases the B shares of a mutual fund, the sales charge is deferred until the fund is sold. This deferred load generally decreases each year. B shares charge a higher asset-based sales charge than the Class A Shares.
l Class C Shares: Class C shares generally do not impose a front-end load, but often charges a nominal fee if the shares are sold within one year. Class C shares often impose a high asset-based sales charge but do not convert to A shares when the load reverts to zero.
If you are just a beginner, you may not have enough knowledge or risk appetite to fulfill the minimum initial investment. In such a case, begin with low-cost large capital funds.
BSE Institute has successfully educated and trained lakhs of students and working professionals to invest in stock markets. It also has an online platform called BSE Varsity, which provides online short-term courses for anyone interested in learning more about stock market investing. A short-term course on Building wealth with Mutual Funds can help you learn more about mutual funds and growing your investment portfolio.