There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”

Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.

As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:

You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive.

When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier than taking a train.You can spend your time for other activities of your choice / liking. Professional fund management is one of the best benefits of Mutual Funds.

Do you visualize roller-coasters or toy trains first when you think of an amusement park? Probably the former. These rides are usually the biggest attractions in such parks which create a certain perception about amusement parks. ‘Mutual funds’ too carry a similar perception that they invest only in stocks and hence are risky. There are many types of Mutual Funds meant for the varying investment needs of people. Some investors want high returns which only stocks can deliver. Such investors can invest in Equity Mutual Funds which are among the best long-term investment options available for achieving such objectives. But these Mutual Funds have risk of higher volatility because of their exposure to stocks of various companies.
There are other types of Mutual Funds that do not invest in equity but in bonds issued by banks, companies, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers,) which have lower risk but also offer lower returns compared to equity funds. These funds are better suited as alternatives to traditional options like bank fixed deposits or PPFs. Hence if you are looking to invest your money that can give you better returns than a bank or post office FDs and still be more tax efficient, Debt Mutual Funds are a great way to achieve such financial goals.

In Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this?
If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.
In the Mutual Fund universe, a liquid fund is least risky and an equity fund is most risky.
So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon.
Every category of mutual fund schemes have different types of risks – credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. Your MFD and fund manager’s expertise, and diversification, can help mitigate them.

Risks appear in many forms. For example, if you own a share of a company, there is a Price Risk or a Market Risk or a Company Specific Risk. The share of just that company may dip or even crash due to any of the above reasons or even a combination of these reasons.
However, in a Mutual Fund, a typical portfolio holds many securities, thus offering “diversification”. In fact, diversification is one of the biggest benefits of investing in a Mutual Fund. It ensures that the dip in price of one or even a few securities does not affect portfolio performance alarmingly.
Another important risk to bear in mind is Liquidity Risk. What is liquidity? It is the ease in converting an asset into cash. Suppose an investor has an investment that is locked in for say 10 years, and she requires money in the 3rd year. This presents a typical liquidity problem. Her priority at this point is access to cash and not returns. Mutual Funds by regulation and structure, offer tremendous liquidity. Portfolios are designed to offer an investor, ease of investing and redemption.

Mutual Fund investors with long-term investments through SIPs constantly worry about market falls during this period. SIPs are well-designed to overcome some of the Mutual Fund risks like market timing and volatility.
You can beat market volatility through rupee-cost averaging, by investing regularly in Mutual Funds through SIPs. Here you buy more units when NAV is low and vice versa. The cost per unit is averaged out over the long run if NAVs move both ways. For example, if you invest INR 1,000/- per month, you get 100 units if the NAV is INR 10 and 200 units if NAV drops to INR 5. Over longer time period, the average price per unit will fall if markets move in both directions thus helping to lower volatility of returns as well.
If you invest in lump sum, number of units would remain the same during the entire holding period, but their value would go down with falling NAV during market downturns. If you hold your lumpsum investment in an equity fund for long (say over 7-8years), the occasional blips shouldn’t impact your returns as markets usually move up over the long-term. You might end up with a far higher NAV than what you started with.

Making a mistake while investing happens across all investments, and Mutual Funds are no different.
Some of the common mistakes while investing in Mutual Funds are:
Investing without understanding the product: For example, equity funds are meant for the long term, but investors look for easy returns in the short term.
Investing without knowing the risk factors: All Mutual Fund schemes have certain risk factors. Investors need to understand them before making an investment.
Not investing the right amount: Sometimes people invest randomly, often without a goal or plan. In such cases, the amount invested may not yield the desired result.
Redeeming too early: Investors sometimes lose patience or do not give the requisite time for an investment to provide the desired rate of return, and hence redeem prematurely.
Joining the herd: Very often, investors do not exercise individual judgement and get carried away by the buzz in the ‘market’ or ‘media’, and thus make the wrong choice.
Investing without a plan: This is perhaps the biggest mistake. Every single rupee invested needs to have a plan or goal.

When the markets turn volatile many investors start doubting their investment decisions and think of stopping their SIPs or withdrawing their investments. It’s natural to get worried when you see your investments in red during a volatile market. But it would be wise to stay put with your SIPs especially during a falling market because with the same amount of monthly investments you will end up buying more units. We all love to bargain shopping be it during an online sale or simply at the sabzi shop. Isn’t it? Then why not for our Mutual Fund investments when prices are falling?
The market is more unpredictable than even our weather forecast apps. You can never time yourself perfectly to invest a lumpsum amount when the market falls. What if the market falls further after you’ve invested? Similarly, you cannot time yourself perfectly to sell at a market high because the market may go up further after you’ve sold. If you try to catch the market, you will be grossly disappointed, and your returns can be affected due to wrong timing. Hence it is better to invest regularly through highs and lows of the market by investing through a SIP with a clear focus on your goals. You need not worry about market volatility since the cost of your investments will average out over a period.
Courtesy: Mutual Fund Sahi Hai