DOS AND DONTS OF INVESTING IN MUTUAL FUNDS

Do’s of Investing in Mutual Funds

1. Define Your Goals & Risk Profile

• Set clear objectives: Retirement, child’s education, or wealth accumulation should dictate your time horizon and fund selection .

• Assess risk tolerance: Use structured questionnaires (e.g., Mutual Fund Risk-O-Meter) to gauge your comfort with losses and volatility .

2. Strategic Asset Allocation

• Diversify across asset classes: A balanced mix of equities, debt, and gold reduces portfolio swings. Multi-asset allocation funds offer dynamic rebalancing based on market conditions .

• Rebalance periodically: Realign allocations annually or semi-annually to maintain your target risk profile.

3. Systematic Investment Plans (SIPs)

• Harness rupee cost averaging: SIPs smooth entry costs—April 2025 SIP inflows peaked at ₹26,632 crore, reflecting investor confidence in SIP discipline .

• Maintain discipline: Automate monthly investments to stick to your plan, even during market dips.

4. Tax Efficiency

• Know the rates: Long-term equity gains above ₹1.25 lakh taxed at 12.5% post-July 2024; debt fund LTCG over three years taxed at 20% with indexation .

• Use tax-saving funds: Equity-linked saving schemes (ELSS) offer deductions under Section 80C.

5. Monitor & Rebalance

• Track performance: Compare fund returns against benchmarks (e.g., NIFTY 50 for large-cap equity) at least annually .

• Adjust for life changes: Update allocations when financial goals or risk capacity change.

6. Consult a Financial Advisor

• Seek expert guidance: Certified advisors navigate complex tax rules and recommend suitable fund houses .

7. Evaluate Fund Costs

• Compare expense ratios: Aim for equity funds under 0.25%; low-cost index funds can offer similar returns with minimal fees .

• Beware exit loads: Factor in redemption charges when planning your holding period.

8. Explore Complementary Investments

• Consider alternatives: P2P lending, real estate investment trusts (REITs), and gold ETFs diversify beyond mutual funds .

9. Review Track Record

• Analyze consistency: Look for funds with at least 5 years of stable or outperformance relative to peers .

Don’ts of Investing in Mutual Funds

1. Avoid Overleveraging Risk

• Don’t exceed comfort: Never allocate more to high-volatility funds than you can stomach .

2. Don’t Concentrate Your Portfolio

• Diversify holdings: Avoid “all eggs in one basket”; spread investments across sectors and fund categories .

3. Don’t Skip Due Diligence

• Read scheme documents: Understand fund mandates, risks, and fees before committing .

4. Don’t Submit Incomplete Applications

• Complete KYC: Ensure all forms are correctly filled to prevent processing delays .

5. Don’t Neglect Emergency Savings

• Keep liquid reserves: Maintain 3–6 months of expenses in a separate fund or deposit—don’t channel all cash into long-term instruments .

6. Don’t Panic During Downturns

• Stay invested: Sudden redemptions crystallize losses; review fundamentals before making changes .

7. Don’t Overlook Hidden Costs

• Factor in all fees: Trail commissions, transaction charges, and fund management costs can erode returns over time .

8. Don’t Time the Market

• Avoid short-term trading: Mutual funds favor long-term compounding—exit only when goals change .

9. Don’t Seek Quick Gains

• Focus on horizon: Short-term outperformance is unpredictable; target multi-year growth for equity and hybrid funds .

By adhering to these dos and don’ts—supported by current SIP growth data, updated tax rules, and proven asset allocation strategies—you can build a resilient, cost-efficient mutual fund portfolio that aligns with your financial goals.