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Investing in Mutual Funds: Strategies

There are many books out in the market that focuses on investment strategies and investing in mutual funds. It could get quite confusing if you were to read so many of them. So here, we would like to outline just 5 broad ways of looking at investing in mutual funds.

1. Sit Tight, Hang On

After you have chosen the mutual fund and invested your money in it, simply sit tight on it. There are several good reasons for this:

  1. Cost savings. Every time you decide to sell a mutual fund and replace it with another, you incur additional costs - initial entry load for the new fund, exit load from the old fund and so on. Add these costs together and you would be losing quite a bit.
  2. Hard to catch the right timing.If you're buying and selling, it must mean that you are trying to time your investments, hoping to catch the momentum of each mutual fund. The truth is that it is very hard to catch market timing. Even if you can get 70% of your decisions right, the 30% of wrong decisions can cost you all your earnings or more. It has happened before.
  3. Earn potential returns. Don't decide to sell a fund only because it had gone up 20% within 6 months! You should sell a fund when its underlying valuation is high and buy a fund when its valuation is low. Even if a fund had gone up 20%, if its underlying valuation remains low, the fund is likely to go up in the coming future.

So, this is our first recommendation. Slow and steady wins the race. Let TIME be your ally. Sure, the temptation to sell a mutual fund after it has done 20% is great, but your best bet to a healthy financial future is to stay with the mutual fund. Over the long term, it may only give you an annualised return of only 15% a year (some years it will give negative returns), but if you compound 15% over those number of years, you will see how big your investments can become. (Use our Forward Compounder to find out).

Create a SIP - read more about this in Best Strategy of All.

2. Actively Pursue Growth

This is our second recommended strategy. To do this well, you have to come back to everyday! Read the latest breaking news we cover and check your portfolio's returns constantly.

The way to do this right is if you set very specific goals on each investment. Don't buy just because everyone is buying. Ask yourself what returns you can reasonably expect to see on the mutual fund within that kind of time frame. Sell only when those targets have been reached. Then, invest time in proper research and goal forming again, before you do your next purchase.

To capitalise on growth, you would be looking more at narrowly focused mutual funds, such as sector-focused mutual funds. Several mutual funds did more than 100% in 2006, largely because of the market boom. You might think that the Indian stock market might not yield that kind of growth in 2010 or 2011. Where would such high growth come from? Infrastructure sector? Technology sector? Or Pharmaceutical sector? Do your research and invest accordingly.

For those of you who want excitement in your investments, this is the way to go. But remember that you should not bet your last rupee on short term gains. Mutual funds are medium to long term investment instruments. So even if you are a 'growth' investor, you still should let your investments sit for a year or so.

Ok, all said, we still don't recommend this strategy if it adds more stress to your life. We only recommend it if you find it exciting and fun to chase growth.

Next : More strategies