We are fully aware that saving money in a piggy bank or in a bank account can cause the value of our money to erode so that instead of getting richer we are even poorer. Therefore, we need to invest to meet our future needs.
One investment product that can be a choice for us as lay people is mutual funds. Mutual fund is one investment instrument that consists various assets in it, such as stocks, bonds or debt securities, and deposits. Mutual funds collect money from many investors who are managed by investment managers so that their value can grow.
Also, be aware, as a form of investment, mutual funds carry risks so that their value can go up or down in the short term. However, don’t worry, this product is official and all related parties such as investment managers, custodian banks and sales agents are overseen by the Financial Services Authority.
We already understand about the benefits of this mutual fund, but we are still layman and in a big confusion about where to start. In addition, it is also difficult for us to decide which product is right for us.
Now, don’t be confused anymore. Read the following tips before starting to invest in mutual funds.
1. Set goals
Before we invest, we must know what our investment funds will be used for. Like we take a bus or vehicle, we must know the direction we are going to in order to plan a trip and not get lost.
The purpose of this investment can vary depending on our needs and desires. For example, we want to take a vacation or travel abroad, pay for children’s education, buy things like smartphones or laptops, pay a down payment on a house, or to enjoy retirement.
After knowing the objectives, we can determine the investment period to achieve these goals. For example, in the short term or a year, we want a vacation abroad. In the medium term we want to pay a down payment of the house, while in the long term we want to enjoy retirement.
2. Know the risk profile
As an investor, a risk profile is something that must be known before investing because it determines how much risk we can bear. On the principle of investment, the level of risk that we dare to take will be directly proportional to the expected potential yield ( return). If the higher the risk that can be borne, the greater the expected benefits (high risk high return).
Generally, the risk profile that illustrates the character of investors in investing is divided into 3 types, namely conservative or risk averse, moderate, and aggressive or risk taker types. Usually, for those of us who are laypersons, we are classified as conservative, or who avoid risk.
3. Choose the right type of mutual fund
When we know our goals and risk profile, it’s time to choose the right mutual fund. There are four types of mutual funds available to the general public, namely money market mutual funds, fixed income, mixed and shares.
If we have short-term goals of about a year, we can choose money market mutual funds. For investments in the medium term of about three years, fixed income funds can be selected.
Mixed mutual funds can be an alternative medium to long term investment (around three to five years). Then, equity funds are suitable for long-term investment because they have the potential to provide maximum returns.
Now, because we are still beginners, it helps us try short-term investments in money market mutual funds, which are suitable for our risk profile as well. Later, as time goes by, we will be able to identify the movement of mutual fund values, we can start choosing mutual funds with higher risk so that we can get greater profit potential.
4. See historical performance
Mutual fund performance can be reflected based on historical data of a mutual fund such as the movement of Net Asset Value (NAV), return and risk. The longer the historical data used to evaluate, the better consideration will be before making an investment decision.
An assessment of mutual fund performance with good historical data is a minimum of five years. If the performance of a mutual fund over the past five years has been good and only experienced minor losses in times of crisis, it means that the Investment Manager who manages the product is indeed reliable and the mutual fund is worth considering.
In addition, the performance of a mutual fund is arguably good if the increase is above the percentage increase in the Composite Stock Price Index (CSPI) and other similar mutual funds ( benchmarks index of similar mutual funds).
Even so, the thing that also needs to be considered is the past performance of a mutual fund is not a reflection or certainty of future performance, but only one tool to make a judgment before we decide to invest in mutual funds.
We can also compare the historical performance of various similar funds. This comparison can be seen based on a certain time period according to our needs. Comparison data for this mutual fund product is available online.
5. Product selection and investment manager
Before deciding to buy mutual funds, we must know the types of mutual funds and also the contents of the portfolio that forms these mutual funds. In addition, we also need to get to know investment managers who manage mutual fund products.
All information relating to a mutual fund product, ranging from investment managers, custodian banks, to investment policies, has been stated in the mutual fund prospectus. In addition, there is also a fund fact sheet that is updated monthly containing information on managed funds, the contents of the portfolio and a comparison of mutual fund performance.
The most important thing in investing is discipline. When we have set goals, we must routinely set aside money for investment to keep ourselves stick to the beginning plans.
Discipline in the long run does look difficult but when you are accustomed to it becomes lighter and not just a burdensome anymore. In order to achieve whatever your financial goals are, discipline must be applied.
Setting aside salary money at the beginning of the month to buy mutual funds is one strategy to keeps. After that, we can shop or use the remaining money after investment for monthly needs and our goals can still be achieved.
That’s the whole 6 tips for beginners to mutual funds, that’s the basic yet very effective tips that will give you great results for your future financial needs.