This Teachers’ Day, while you may be reminiscing of your favourite teacher with a lot of fondness, it could also be right time to think of some right money advice which financial mentors tend to give to new investors.
Here we list out three key mutual fund principles which most mentors would typically tell their mentees.
Three mutual fund principles to remember:
I. Align your investment with your asset allocation: Rather than chasing returns, investors are supposed to align their investment to their financial goals. For instance, if they want to save for their retirement or to buy a house, they should put a value to it and by using the present value (PV) formula, they can evaluate how much they will need to invest today to meet their financial goal.
While emphasising the importance of not getting too carried away with mutual fund returns, Shaily Gang, Head, Products, Tata Asset Management, says, “Something will always outperform or underperform. Chasing the asset class which performed the best in recent history and shifting allocations accordingly can be a disaster for one’s portfolio. If the portfolio is diversified, some asset classes will always underperform. But to each asset class that underperformed, you would have another one which outperformed.”
II. Build portfolio as per holding period: Investors should build their portfolio in accordance with the holding period. For instance, if they need funds for anywhere between 1 to 3 months, they should invest in the liquid funds instead of the overnight funds. Similarly, to invest for a duration between 3 months to one year, investors should invest in the money market funds.
“Mapping your holding period to the ideal period of funds is important. In case of debt funds ideal holding period is largely related to the Macaulay duration of funds as Macaulay duration is the average time until the portfolio’s cash flows are received. In case of equity funds, longer the holding period better is the compounding and lower the probability of negative returns,” added Ms Gang.
III. Hold emergency funds: Another pertinent thing which investors should remember is to hold emergency funds for a minimum of eight to ten months of their monthly income. This can be a saviour during a rainy day, which will prevent you from redeeming your funds prematurely.
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