Do you know about investing in mutual funds yet? A mutual fund is an investment strategy that allows you to pool your money together with other investors to buy a set of stocks, bonds, or other securities that might be difficult to create on your own.
This is often referred to as a portfolio. The price of a mutual fund is determined by the total value of the securities in its portfolio and divided by the number of mutual fund shares outstanding. This price fluctuates based on the value of the securities held by the portfolio at the end of each working day.
Investing in mutual funds are about collecting money from several investors and investing it in stocks, bonds, money market instruments, and other types of securities. Want to try mutual fund investing? Take note of the following:
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Mutual Fund Categories Have Different Levels of Risk
The first and important point is that the risk of each category of mutual funds is different. Certain categories of mutual funds cannot be said to have high risk or low risk based on the same scale or parameters.
Of course, if you invest in direct equity, then in comparison, equity mutual funds are low risk. But the risks associated with each mutual fund category are different.
So, before you invest in any mutual fund, check the riskometer of the mutual fund. Each scheme has risks assigned to it and you can see what risks you will take.
Investment Returns Are Never The Same
Usually when you hear a investing in mutual funds return, it’s an annual return. This can give the impression that you will earn the same profit every year.
Suppose the annual yield of a particular Mutual Fund Scheme is 8%. That doesn’t mean you will earn 8% every year. This is because the rate of return of mutual funds is not linear. For example, a Mutual Fund Scheme may give you a +10% return in the first year, while it may only give you -2% in the second year.
There may be a no-return period as well. Therefore, you need to be prepared to see this variability in your annual returns.
The Importance of Asset Allocation
Asset allocation is the process of dividing your investments across asset classes to reduce the risk of your portfolio. Before you start investing, decide how much you will invest in different asset classes such as equities, gold and others. After that, you invest in mutual funds.
In addition, rebalancing is also as important as asset allocation. Rebalancing means that whenever an asset class runs and its percentage in your portfolio goes up, you book a profit from it and reinvest the money into another asset class that is part of your portfolio.
Once again, if you are interested in mutual fund investment, it’s a good idea to find as much information as possible regarding the investment you want to make.