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Home / Money / Calculators /  DYK: The three questions you need to ask before investing in a mutual fund

As easy as it is to grasp what a mutual fund (MF) does, it could sound a bit complicated if you are investing in it for the first time. Here are three questions we feel you need to ask yourself to ensure that you have a good investing experience.

WHY AM I INVESTING?

It’s important to know what your goals are. What are you saving for? Do you want to buy a house, a car or go on a foreign holiday a few years down the line for which you are saving? First, your goals will tell you how far they are from the point you wish to start investing. Second, they will realistically tell you how much you need to save. For instance, if your goal is too big and too near, maybe it’s unrealistic for you to consider the MF investment you are about to start to meet it.

But if it’s a goal—like your child’s education or your retirement, which we assume is years away—MFs are a good starting point. Some of us keep away a portion of our savings in an MF every month without thinking what we will do with the money in future. This is fine to a point, because at the least, it inculcates the habit to save regularly.

But keeping a goal in mind is always a good idea because it gives a purpose to save. You then know realistically whether you need to save more or not. Besides it labels your investment; this ensures you don’t withdraw indiscriminately when you need some money later.

HOW MUCH IN EQUITY AND DEBT?

There are various types of MF schemes. Some invest in equities, others invest in debt markets. Equity funds take risk, and so they stand a chance to earn higher returns. Hence, they are meant for the long run, because it takes time for these funds to work. Debt funds take much lesser risk, comparatively, and they are to be used for relatively short term goals. Naturally, their returns are subdued when compared to equity funds. So, depending on your goals—and how much risk you can tolerate in your portfolio—you will need to mix and match.

This is called asset allocation. Everyone’s portfolio should, ideally, have a mix of both types of schemes. But the proportion depends on your risk tolerance. Once you decide your asset allocation, you need to more or less maintain it, as equity and fixed income markets move up and down, over time.

DISTRIBUTOR OR DIRECT?

If you have trouble answering the questions above, you definitely need a distributor or a financial adviser. A good distributor or adviser helps you crystalise your thoughts on why you wish to save, and what it is that money can achieve for you. And then she helps you choose schemes that best fit your needs. But if you have it all figured out, it’s best you invest through a direct plan. These plans have lower expense ratios and are meant for those who wish to bypass distributors.

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