How to start investing in funds - 4 steps to get started

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Want to start taking your first steps in fund investing? Be sure to read this article. You'll find tips that are essential for novice investors to follow.

Develop a plan. You need a strategy.

When it comes to mutual funds, the rate of return largely depends on the investment strategy you choose.

That's why it's important to define a plan for your investments.

You can meet such an interesting rule, which says that the share of risky instruments in the portfolio should be equal to the difference between 100 and our current age. That is, the younger we are, the more risky investments we can make. Of course, this is only a starting point, which should be fine-tuned individually to your situation.

The more risky funds (e.g. stock funds) may bring high income, but also a high loss (in the case of a stock market slump). The safest funds (e.g. money market funds) usually yield less, but are a more stable form. However, no fund guarantees achievement of a given investment objective, i.e. obtaining a specific profit.

An investment strategy should be a plan of action. How to define it and what should guide it?

When choosing an investment strategy, you should be guided by

  • the investment objective
  • time horizon, which is a derivative of the defined objective
  • Your own risk appetite
  • Your current financial capabilities
  • expected level of profit

Using the above points, you should define your investment objectives. It's very different to invest money for retirement in funds and money that represents free financial surplus. Consequently, different goals can mean different time horizons. While for retirement you may assume a very long-term horizon, for other funds you may decide on a shorter period.

In doing so, you can't forget to determine your risk appetite. This is very important at the beginning. Acting under the influence of emotions can have disastrous consequences for your investments in the future. Think about how much risk you are willing to bear and immediately determine the right moment for you to withdraw from a given investment. This will allow you to coldly determine a certain course of action, without unnecessary emotions.

Provide a safety cushion

If you want to start taking your first steps in investing in funds, remember to secure your savings. The best solution is to build up a safety cushion beforehand. Of course you shouldn't invest this money. Why? If you have defined your investment strategy from the first point of this article, you already know what should be the goal of your investment, time horizon etc. Your financial cushion savings should be kept in a safe but reasonably accessible place and should protect your investments. When something happens in your life that you need to use your life savings, then you will take the money from your cushion and not the money that is working for you in the funds. Despite the unexpected events in your life, this will allow you to stick to your previously chosen investment strategy.

Especially if you are just starting to invest in funds, the money you allocate should be your financial surplus.

A financial surplus is money that you won't need anytime soon. It's also money that, if lost, won't significantly impair your life! 

Keep your finger on the pulse

When we customers buy units of a particular fund, we create a certain pool of money. The mutual fund is divided into units, which are owned by customers. It is managed by specialists dealing with a particular fund. Their main task is to maximize profits and reduce risks. The entity that manages the Investment Fund is the Investment Fund Company.

This makes Investment Funds one of the simplest forms of capital multiplication. But beware, this does not entitle us not to gain knowledge about this subject. After all, we are the ones who make the most important decision at the very beginning, to join a given fund.

Therefore, before you join a given fund, read its prospectus. Each open-ended investment fund has a prospectus, which is a document available to the public. The prospectus is the place where you can find information about the investment fund:

  • possession of a permit from the PFSA
  • entry in the register of the fund
    participant's rights
  • structure, category of units sold
  • rules for execution of orders
  • basic principles of investment policy
  • investment risk and investor profile
  • tax obligations of the funds

In every prospectus there is a fund statute, which is its part. It is a document drawn up in the form of a notarial deed, which regulates the rights and obligations of the participant and defines the organization and operation of the fund (among others, the fund's investment objective, principles of investment policy, handling fees, frequency of valuation of assets, minimum amount of the first and subsequent payment).

Choose your products accordingly

I wrote earlier that mutual funds are one of the easiest forms of investment because they are properly managed by experts. There are many more reasons, of course, and one of them is that funds offer a wide range of activities. You can build your investment portfolio any way you want by selecting funds with different risk levels and, consequently, different expected rate of return.

Individual funds are divided into three basic groups based on risk level.

Breakdown of funds by risk:

(a) Safe (low risk)

- Money market funds and cash funds

- Debt funds

b) Mixed (medium risk)

- stable growth funds

- balanced

(c) Aggressive (high risk)

- equity funds

Safe funds - their task is to provide stable capital growth at the minimum risk of its loss. These funds are suitable for people with a high aversion (aversion) to risk. They are characterized by low volatility, so they may be an appropriate choice for beginners. They are also quite often chosen as an alternative to part of the funds on deposit. Safe funds may include: debt funds, cash funds, and money market funds.

Mixed funds - investments in various proportions. Their purpose is to increase the portfolio value over a long period of time at moderate risk (depending on the fund type). Mixed funds may provide a higher rate of return than safe funds. Mixed funds are divided into: stable growth funds, balanced funds.

Aggressive funds - their purpose is to achieve the highest possible profit while maintaining a high level of risk. Sometimes rates of return in stock funds can be very spectacular. These funds reflect the situation on the stock markets - when there is a bull market, units lose value. When stocks are booming and stocks are going up, the value of the shares goes up. That's when fund customers make big gains. With this type of investment, a long time horizon is recommended (usually at least a few years). Stock funds are characterized by high volatility over a short period of time, so they're not recommended for beginners, people with a high aversion to risk, or people who want to invest for a shorter period of time.





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