Let’s talk about something exciting- buying a car! It’s a dream for many of us. I’m sure this is the case with Mr. John Doe as well. Right, sir? Well, he just nodded his head in agreement. So, how do you propose you or anyone else go about it? If I’m not wrong, Mr. Doe, you must’ve spent hours, days, and maybe even weeks researching your dream car, reading customer reviews, and consulting experts before finally making the big purchase. Am I right, or am I right? Well, I know I am. Now, my question to you is, do you apply a similar strategy when it comes to managing your finances and investments? No? Why not? Don’t you think it would be a good idea to research where you’re investing your hard-earned money or even consult a financial expert before choosing a fund? If you’ve never thought about this, now is the time! I, Ishita Singh, am here to help you and Mr. Doe clear these doubts and understand how to choose the right mutual fund for your investments. So, let’s get started!
Are There Any Prerequisites for Choosing the Right Mutual Fund?
So, Mr. John Doe has a question that many of us may have but are hesitant to ask. He wants to know (and I’m sure you do, too) if there are any prerequisites for choosing the right mutual fund. This is a crucial question that we very often overlook and end up making risky life decisions. And this is followed by us wondering- “Mere saath hi aisa kyun hota hai?” Anyway, to answer Mr. Doe’s question, yes, there are 2 things you absolutely need to take care of before you choose a mutual fund scheme and start investing- knowing your investment horizon or anchoring period and risk profile. Now, if you have little to no knowledge about investing, you might be wondering what these are. But you don’t have to worry, as I’m here to clear your doubts. Just sit back, and I’ll explain what these scary-looking terms mean.
Investment Horizon or Anchoring Period
Knowing your investment horizon before you choose a mutual fund is as important as knowing your right size before buying clothes. After all, no one likes buying ill-fitted clothes. Then why start an ill-suited investment?
Think of it this way- if you buy clothes that don’t fit, you won’t feel comfortable, and you’ll end up regretting your purchase. The same is true for investing in mutual funds. When you know your anchoring period, which is the amount of time you’re willing to hold your portfolio, you can make an investment that’s tailor-made for your needs.
By knowing your investment horizon, you can make an informed decision based on your financial goals and risk tolerance. It’s like having a roadmap to success!
Risk Profile
Picture this- you’re on a rollercoaster, blindfolded and completely unaware of the twists and turns that await you. Sounds terrifying, right? Well, that’s exactly what it’s like to invest in a mutual fund scheme without knowing your goals and risk profile. It’s like taking a wild ride without any idea of what’s ahead, and it’s sure to leave you feeling shaky and unsteady.
But fear not! Just like removing your blindfold on the rollercoaster, taking the time to understand your goals and risk profile before choosing a mutual fund scheme can make all the difference. Your risk profile is an evaluation of your ability and willingness to take risks based on various factors, such as your age, income, investment goals, and overall financial situation. It allows you to take control of your investment journey, giving you a clear idea of what you’re getting into and what to expect along the way.
Besides, you can choose your mutual fund scheme depending on whether you’re looking for a long-term or short-term investment strategy. If you’re in it for the long haul, consider investing in an equity fund- it’s a great way to maximise your returns over time.
So, before you take the plunge, take that blindfold off and get a clear view of where you’re headed. Your investment journey will be much smoother and more rewarding for it!
Now, How Should You Begin?
Let’s face it- starting anything new can be intimidating, and investing is no exception. And to be honest, not knowing where to begin is a genuine concern. After all, the beginning of anything is where most panic strikes. But don’t worry, you’ve got this! As Taylor Swift says, “You Need to Calm Down!” and I’m here to help you do just that.
So, where should you begin your investment journey? The answer is simple- by getting in touch with a financial expert. Now, you might be wondering, “What do I need a financial expert for when I know what anchoring period and risk profile are?” Well, let me tell you something: knowing something in theory and being able to apply it in real life are two very different things. That’s where a financial expert comes in. They can help take your knowledge to the next level and guide you through complex financial situations with ease.
If, by any chance, you don’t know who a financial expert is, then think of them as doctors of finances (obviously) who know exactly what’s best for your hard-earned money. Just like a doctor can diagnose an illness better than anyone else, a financial expert knows which mutual funds would best suit you based on your goals and risk profile. So, don’t you agree that contacting a financial expert is a crucial first step for successful investing?
How Does Knowing Your Investment Horizon and Risk Profile Give You an Edge?
So, it seems like you’re well-versed with the concepts of anchoring period and risk profile, and you’re also aware that consulting a financial expert is the way to go when it comes to investing your hard-earned money. But are you still curious about how knowing these factors can give you an edge and help you stay ahead of the investment game? Well, buckle up because we’re about to dive into some exciting insights.
Here’s what we found: if you know your investment horizon and risk profile and have the money to invest, you are bound to receive higher returns. Let me break it down for you:
- If you can only invest for a maximum of 7 years, then investing in large-cap funds would give you returns of around 12%.
- If you can invest for around 8 years or so, then investing in mid-cap funds is the most suitable option for you as you can get returns of up to 14%.
- Lastly, if you have an investible surplus and an emergency fund to fall back on and know that you won’t need that money for the next 10 years, then you might consider investing in small-cap funds, which can give you returns of up to 18%. That’s a lot, right?
Now, let’s take Mr. John Doe’s example. He had an investment horizon of 7-8 years and a moderate risk profile, so investing in mid-cap funds is what he did. With a mid-cap fund investment, John received returns of around 16%. By knowing his anchoring period and risk profile, Mr. Doe made informed decisions when it came to investing his hard-earned money, which helped him gain maximum returns.
So, to summarise, knowing your anchoring period and risk profile will help you make informed decisions when it comes to investing your money and, in turn, help you gain maximum returns. And who doesn’t want that? After all, we could all use a little extra cash for those Friday night takeouts.
On a Parting Note
I presume you know that choosing the right mutual fund isn’t a one-size-fits-all deal. It’s more like finding a pair of shoes that just fits right—personalised and tailored to your needs. John Doe attained financial success by consulting a wealth manager because he knows they are like the wizards of the financial world, decoding your investment goals, risk tolerance, and investment horizon, or what we call in BFC, anchoring. All I know is mutual funds are the game changer if you dare to take the step!
Also, please share your thoughts on this post by leaving a reply in the comments section. And don’t forget to, check out our recent post on “Maximise Your Tax Savings by Investing in Elss Before 31st March 24′”
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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.
