The Securities and Exchange Board of India (Sebi) has recently announced some lucrative measures to restore the capital market by wider participation of retail investors in initial public offerings and the mutual fund industry. The reforms came at a time when analysts are stressing on the point that the participation of retail investors is going to stabilize the volatile Indian markets.
The move was aimed to increase the penetration and base of mutual funds. With Sebi's move to encourage the retail investors, here are few major things a retail investor has to take care before investing in the mutual funds.
- Assess the current personal financial situation: The first and foremost thing a retail investor has to do is to make sure that he assesses his current financial situation comprehensively to determine his financial standing. He should decide on his risk appetite by taking into account his financial position. Risk appetite is the deciding factor in the type of instruments one can invest in.
- Research the instruments before investing: Research is a very important aspect of investing. The success of an investment depends mostly on having the right information at the right time. Research helps in short-listing the type of funds that match your risk appetite. Research doesn't simply end with choosing the appropriate funds. The investor should read the offer document carefully and know his rights and charges before investing in the fund.
- Diversify: Diversification aims to maximize returns by investing in different instruments that would each react differently to the same event. Diversification is the most important component of reaching long-range financial goals while minimizing risk.
- Don't make the portfolio crowded: Managing and monitoring the funds invested is an important task. It is always advisable to limit the number of funds being invested in to a maximum number of eight. The problem with investing in more funds is the difficulty in keeping a track of all the investments. The other problem that can be associated with investing in many funds is the degree of overlap. The cross-holdings in two or more funds defy the theory of diversification. So it is advisable to select and invest in minimum number funds making sure that they match the risk appetite and have a little or no overlap.
- Holding period: The most common mistake made is the failure to give a time dimension to the investments. Do not panic when markets crash and sell-off the funds immediately after the first instance of underperformance. Long-term perspective helps in normalizing the volatility in the market. It helps in reaping better rewards.
Nitin Vyakaranam is the founder and chief executive officer, ArthaYantra, an integrated online personal finance company.
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