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5 things to do before you start investing (in mutual funds)


Youngsters are eager to start their mutual fund investments these days.
ETMutualFunds.com receives several messages from them asking for help with their investments. However, we believe these young investors should put together a few things in place before starting their investment journey. Here are a few basic things you should include in your financial planning.

Get a health cover

Everyone needs a health cover, including young investors. A sudden health emergency can jeopardise your investments plans for a few months. Healthcare costs have risen sharply over the years. So, it is important for you to get a large health cover for you (and family if you have financial dependents). Do not bank on the health cover offered by your employer. Such cover ceases to exist once you leave the job. If there is a health care between the jobs, you would be in for a lot of trouble.

How about life cover?
This is not a must-have cover unlike medical insurance. However, you must get an adequate life cover if you have financial dependents. And you must only buy pure term insurance. Do not fall for endowment and ULIP – insurance schemes that come with saving or investment element in them. They are expensive and offer a modest cover. A pure term cover is cheap – that means, you can buy a very large cover with a small premium.

Ready for an emergency?
Do you have liquid cash that you can pull out to tackle an emergency or a job loss? Can your parents help you with that? If no, you should create a contingency fund that would take care of your living expenses for at least six months. If you have dependent parents or siblings or working in a sector whether there is a job threat, you should keep more money. You may keep the money in a bank account or liquid scheme. Some individuals also keep a part for their emergency fund in arbitrage funds or ultra short duration schemes.

Don’t start the usual manner
Don’t fall for the conventional wisdom of `playing it safe’, buying insurance plans for investment purpose, focusing on tax benefits, etc. Many youngsters fall for these sales pitches and end up with long-term insurance products. They would waste the initial years of their career servicing the high premium. Always remember, it is not easy to get rid of insurance plans. Mostly, you will lose a lot of money if you discontinue an insurance plan. So, stay away from life insurance plans other than a pure term plan.

Do not forget the basics

Let us get back to mutual funds. We always say this and even love to repeat it all the time: you should always choose your mutual funds based on your financial goals, time in hand to achieve those goals, and risk profile. Stick to bank deposits and debt mutual funds if your goals need to be met within three or four years. For long-term goals of five years or more, you may consider investing in equity mutual funds. However, always make sure that you choose the category that meets your risk profile. Do not assume your risk profile. Try an online quiz to sharply define your risk profile.



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Written by sortiwa

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