Over the years, the number of people investing in mutual funds has been growing at a steady pace. For investors looking to grow their wealth quickly, mutual funds seem like the most suitable investment option. While there are a number of risks that come with mutual fund investments, the risk is minimised to a certain level as a result of diversification in the investments made.
How do mutual funds work?
A mutual fund is essentially a company that collects capital from a number of investors, pools them together, and invests them in a number of debt and equity instruments. The investment portfolio is managed by professional experts who make strategic decisions so as to get high returns for their investors. The returns are distributed to the investors in the form of dividends or capital appreciation. Mutual funds also make for a good investment for individuals looking to invest in the stock market but are not privy to its workings.
Making the most out of your investment
While the goal for all investors is to yield high returns, it is not always the result with a mutual fund investment. However, there are a few strategies that can help with increasing returns and making the most of a mutual fund investment.
- Diversifying your portfolio
- Choosing a SIP
- Goal-based investments
- Choosing direct mutual funds
- Assessing risk appetite
- Regular review of fund performance
A diversified mutual fund portfolio is one of the primary factors when it comes to gaining risk-adjusted returns. All categories and subcategories of mutual funds vary in terms of their performance based on the volatility of the stock market. Therefore, ensuring that your capital is invested in an assortment of instruments will help with lowering risks. Additionally, investing in large, small and mid-cap stocks further widens your portfolio. Over time, this can help you get higher returns on your investment.
Systematic Investment Plans (SIPs) are a great way to invest in a mutual fund. SIPs are relatively low-risk investments and tend to earn better returns even in instances when the market is low. Furthermore, it can help protect your investments from any potential crashes in the market. With SIPs, timing is not as much of a determining factor when it comes to earning higher returns. Additionally, the interest on SIPs is compounded and thereby results in higher returns. An added benefit of the SIP is that the investment can be made in small monthly installments and will not necessarily be a burden on personal financial planning.
One of the best practices when it comes to mutual fund investments is to invest with the objective of achieving a particular goal. These financial goals can range from funding a child’s higher education to purchasing a home or car or even funding retirement. Once the intended goal has been achieved the investment can be reviewed and reclassified.
Direct mutual funds are investments where the asset management company does not charge any kind of fee for the investment. With regular mutual funds, the expense ratio is higher owing to the fact that the individuals who manage it charge a commission every quarter. This fee is paid through your investment. With direct mutual funds, the amount that would otherwise be added to the broker’s commission is added to your investment balance, thereby yielding higher returns.
The general rule of thumb with mutual fund investments is to take into account your risk-taking ability based on your age. When you make an investment when you are young, it is advisable to invest a majority of capital in equity funds. As you get older, the amount invested in equity funds should be gradually decreased and should be invested in debt instruments instead. Many financial experts have given their opinion on the proportion of debt to equity investment. The most common of the lot is your current age subtracted by 10 for the percentage that should be invested in debt securities and your current age subtracted from 100 for equity instruments.
Regularly reviewing the performance of your fund can be extremely beneficial. It helps you make calculated decisions on asset allocation and diversification of your investments. Additionally, it also enables you to constantly assess your risk appetite and how it affects the financial goals that you have set. Moreover, regularly reviewing your fund’s performance keeps your investment active and in accordance with the conditions of the market. This knowledge can help with earning higher returns throughout the term of your investment.
For those who are in a hurry to achieve a particular financial milestone, a mutual fund investment could be the answer. Most financial experts agree that one of the best ways to help one generate their wealth and achieve their financial goals is to begin investing early on in life. Additionally, options such as SIPs do not require a lump sum amount to be invested in a mutual fund.