It is said that no one should measure the depth of the water with both feet. Likewise, enthusiastic about any market rebound, a first-time investor should not drown and invest heavily in the exclusive equity segment of Mutual Funds (MFs), an investment that is subject to market risk.
Novice investors generally start stock investments in a high market, when existing investors have already had a double-digit compound annual growth rate (CAGR), oblivious to the fact that experienced investors have invested in a lower market.
Therefore, while entering the stock market for the first time, investors should take a cautious approach by investing in relatively less risky funds and getting used to market volatility.
A first-time investor should do the following while investing in equity-oriented funds:
Never make big investments in a lump sum
An investor should avoid making large investments in stocks. This is because any subsequent market crash would generate a negative theoretical return, which could frustrate the investor, especially if he is a first time investor and has never seen a drop in the invested capital. In such a situation, novice investors who are panicking often decide to withdraw their money and, accordingly, suffer losses.
Therefore, it is always advised that investments in equity-oriented funds should be made through a Systematic Investment Plan (SIP).
Invest in less risky funds
To get used to market volatility, rather than high-risk pure equity funds, it is best for first-time investors to invest in balanced funds with moderate risk due to exposure in the fixed income sector. Such funds will fluctuate less than pure stock funds during market volatility and will cause less investor panic and make first time investors stay invested for the long term.
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Therefore, instead of starting with high-risk pure equity funds, it is better to invest in funds, which are relatively less risky.
Make a financial plan before investing
If an investor begins investing in equity-oriented funds with a motivation to achieve a long-term financial goal derived from proper financial planning, the investor is more likely to overlook short-term fluctuations in order to achieve the long-term goal, compared to an investor who has only entered the equity segment for quick returns.
Therefore, it is best to do financial planning to determine how much to invest in any category of fund before investing.