Crucial factors to consider before going forward with mutual funds plan

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Financial security is one of the most important aspects of living a stress-free life. Taking care of one’s finances is crucial when it comes to building a strong foundation for oneself and loved ones. One of the smartest decisions a person can make, for their long-term savings, is investing money in mutual funds. A smart mutual funds plan can ensure financial security, and help one to grow their wealth, even when sleeping, and break free from depending simply on one’s salary.

However, investing in mutual funds needs elaborate planning, and one needs to follow certain protocols in order to ensure they are investing in the best mutual funds plan. It is important to research every component of a plan, and look not just at immediate, but also long-term benefits. It is also integral to analyse the risks involved in investing. So here are crucial factors to consider, before investing in a mutual funds plan:

1) Always consult an expert when finalizing on the investment plan:

Mutual funds always need in depth understanding. It is a very wise idea to consult a financial expert when it comes to investing in mutual funds. With the help of a qualified professional, who understands the nuances of the market, a customized plan can be created that would work best for an individual. Since the markets are very dynamic, expert assistance can help one to utilize their funds in the best possible directions, while also creating a way forward through the guidance of someone who has years of expertise in the domain and sound financial knowledge.

2) Have a clear goal/objective in mind for investing: When dealing with money, and entering the world of wealth building, it is always imperative to understand one’s objectives and curate clear financial goals to achieve through one’s strategic investments. One needs to define their way forward, and accordingly look for a plan that fulfils one’s expectations and objectives for the money being invested. This will not only help one have a clearer picture of what can be expected from one’s hard-earned saved amount, but also help the person experience greater security.

3) Have a fixed time period in mind when choosing a plan: One of the most essential considerations, before going forward with an investment plan is fixing the time period. Subsequently, it is important to evaluate every criteria such as interest rates. One needs to thoroughly examine the long term returns of the plan after a specific time frame, to see if it matches with one’s outlook for the future or any upcoming spending that may occur after the time frame.

4) It is imperative to take one’s current financial position into consideration before making any decision: Investing in mutual funds can offer great returns, but it is always important to take into consideration one’s economic circumstances, in order to come up with a clear future roadmap. One absolutely needs to evaluate important criteria such as the assets/liabilities and income/expenses of the investor, in order to proceed with a plan that will yield the best long- and short-term results for them.

5) Choosing the appropriate asset class to invest in to achieve the desired objective: Every investor aims at making profits from his/her investments. In order to ensure this, investors need to choose the right asset class, which may vary from fixed income instruments, to stocks and other assets before proceeding with an investment. By picking the right group of investments within an asset category, one can not only minimise any loss as much as possible, but also reduce the fluctuations of investment returns.

6) Exercise caution when investing in bonds: Bonds usually offer great results, but they are not always free of risk. While they are relatively safer than investing in the stock market, one needs to carefully look into the terms and conditions and plan accordingly, especially when on a five-year timespan. One also needs a clear understanding of the different kinds of bonds to choose a plan that suits them. Corporate bonds make up for high taxation with greater yields, whereas high yield bonds offer a greater payout, but have a higher market risk.

7) Understand the tax laws: It is important to understand the legal framework of one’s country, when it comes to finance. The smartest investors have a thorough understanding of not just the markets, but also the tax laws. Awareness goes a long way when it comes to financial planning and one needs to pay attention to the tax liability, apart from looking at the return potential and risk possibility when investing in mutual funds.

8) Building a diverse portfolio is key for greater returns: It is integral for an investor to choose a diverse mix of plans to invest in for long term profitable returns. when it comes to investments, diversification is the ideal method to mitigate risks and allow your portfolio to perform better. Mutual funds are the easiest way to achieve diversification as well as asset allocation. It is also important to remember that diversification in investments is not about numbers, but about investing across asset classes and sectors.

Mutual funds offer the security to all those who invest and it is the best possible way to save time and effort, and build profit instead. Investing is not a one-step exercise. It is a journey that can help one create the life they always envisioned. And if one does it right, the journey can be very fruitful and enjoyable!

The author, Dhruv Mehta, is Chairman of Foundation of Independent Financial Advisors (FIFA). The views expressed are personal

(Edited by : Anshul)

First Published: Nov 20, 2021, 04:44 PM IST

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