6 rules for investing in mutual funds

Money is a very strange thing-human beings make rational decisions while dealing with most aspects of life but make serious errors of judgment when it comes to dealing with money and finance including earning, protecting, budgeting, saving, spending, leveraging, investing and insuring.

Following are the 6 rules which an individual can follow while investing in mutual fund and gain the best out of their investment.

1. Asset Allocation Plan

While allocating assets, remember to allocate only that much money to equity funds which you won’t require for at least the next 5 years, and which you can afford to lose up to 50 per cent in the short term without any panic.

2. Regularly invest budget surplus in MF’s

Try to create a budget surplus by ensuring your income is more than your expenses. Then, channelize your additional income properly into investments like mutual funds.

3. Avoid over investment in Liquid Funds

Liquid Funds are only for parking “temporary surplus” and not for long term investments. If you believe that liquid funds are for long term investments then you believe in the fallacy that ‘saving is investing’ and will be in for a rude shock.

4. Should not ignore Equity Funds

One should not ignore equity funds because they are the gateway to long term wealth creation. If you ignore equity funds and only invest in debt funds then you are committing a grave mistake, which may considerably hinder your long term wealth creation potential.

5. Don’t ignore index funds

The words of the great legendary investor Warren Buffet who once said that “most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals”.

6. One should understand the fund before making any investment.

The primary purpose of MFs is to make your life simpler by investing your money on your behalf. However in reality, they have made your life difficult by making available a plethora of different categories and schemes. Hence, before biting the bullet, get acquainted with the category of fund you are investing in – Equity, Fixed Income, Balanced, and Commodity – and within them the various sub-sets like sector, theme, gilt, income, short-term, liquid etc.

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