Mutual funds have proved to be one of the best investment options when it comes to creating wealth over the long term. ‘You can create wealth even when you are asleep’ is no longer an exaggeration. By investing small installments via SIP or lump sum in mutual funds, you can see your money grow. If you’re a long-term investor you should consider investing in mutual fund schemes. However, not all of us are ready to invest money in the equity markets and to address this, mutual fund houses have equity, debt, fixed income, money markets, index and even balanced schemes.
Another reason why many investors are wary of investing in mutual funds is that they don’t know how to go about it. If you are familiar with investing, you wouldn’t really live in the confusion. Let’s discuss how easy it is to invest in mutual funds and here’s how to get started.
Fix Your Financial Goals
Each one of us has got certain financial goals to achieve. Some of us want to buy a home while some of us want to go on a world tour. Financial goals differ from person to person. It could either be a short-term goal or a long-term goal. The key to better financial planning especially when it comes to investing in mutual funds rests on penning down the various financial goals you want to achieve in your life and the timeframe to achieve them.
Let’s assume that you want to send your child to college in the next two years. Then, the best mutual fund scheme would be debt mutual funds. Why debt mutual funds? As you know the market is full of risk especially in short-term, you can’t afford to risk your money in the short-run.
In another instance, if your goal is to own a house, let’s say in the next 10 years, the best option, in that case, would be to invest money in equities. Historically, equities in long run have always garnered higher returns compared to any other instrument in the market.
Be a Disciplined Investor
If you consider investing in equities for short term, you are risking your hard-earned money. The key to successful investments in equities is to hold on to equities for a long term. Your investments will certainly take hits in short or even medium terms since stock markets are always volatile. Historically, the stocks that became multi-baggers too went through a tumultuous phase.
Above all, the secret to creating wealth in mutual funds is to be disciplined and patient.
Diversification Saves You from Volatility
Warren Buffet, the greatest investor of the 21st century, who is also known as “the Oracle of Omaha, says, “Don’t put all your eggs in one basket.” A diversified portfolio with a different class of instruments will help you minimize risk while maintaining consistency in it. However, even before you think of diversification, first analyze your risk-taking capability and the time that you have fixed to achieve your goals.
Factor in Your Risk Appetite
The most important part of planning investments in mutual funds is, to begin with, the question, ‘How much risk appetite do I have?’ If you are somebody who does not want to take any risk, the ideal choice for you could be debt investments. On the other hand, if you like to take calculated risks and want to amass wealth in the long run, investing in equities is the way to go. In addition, a standard risk profile should be 30:70 distributions across equities and debts.
If you are in your young age (in the 20s) now is the right time to invest in mutual funds as age plays a significant role in your investments. Starting early will give your portfolio enough time to grow. Hence, your risk is at the minimum.
Hire a Mutual Funds Expert
I understand that not all of us are financially literate. If you find it tough to understand investments or have no familiarity with mutual funds, you don’t have to worry about it. You can avail the services of a wealth manager who will help you understand the nitty-gritty of mutual funds. They will not only help you understand mutual funds but will also suggest different schemes in addition to addressing your important queries.
Mutual Funds vs Stock Market Investment
The difference between investing directly in the equity markets and via taking the mutual funds route is the latter offers you expert assistance in taking all your investment decisions. For a small fund management fees an expert fund manager will invest on your behalf in multiple sectors or stocks as per the scope of the mutual fund scheme. A good fund manager with a rich experience mostly outperforms the major indices and gives good returns to the investors.
Now that you have understood how to go about investing in mutual funds, please note that it is equally important for you to track the performance of your portfolio from time to time.
Balance your portfolio based on market conditions. Lastly follow successful investor like Warren Buffet, Larry Williams, Rakesh Jhunjhunwala and other, who made a phenomenal fortune by investing in the equity market. The common characteristics you will come across all of them is that they had patience and the discipline to be successful investors.