Investing your money in mutual funds can help you build a substantial corpus for meeting your financial goals, irrespective of whether they are short term or long term.
Keeping your hard earned money idle doesn’t allow it to grow and contribute in fulfillment of various financial goals such as buying a car, or saving for child’s higher education, marriage and retirement etc. On the contrary, investing this money in mutual funds can help in building a substantial corpus for meeting your financial goals, irrespective of whether they are short term or long term.
Let us discuss the strategies which can help you to build a bigger corpus and earn more through mutual funds:
1. Use SIPs for disciplined and regular investment
Systematic investment plans (SIPs) allow you to invest small amount of money at regular intervals (on a monthly, quarterly basis) in order to build an adequate corpus over the years. Since this SIP amount is auto-debited from your account on predetermined date, it ensures regular and disciplined contribution towards wealth creation. You can start investment in SIPs with a minimum contribution of just Rs 500. Also, since markets are volatile in nature, rupee cost averaging can be beneficial for investors, as it averages out the cost at which you buy mutual fund units. In addition to this, it also helps in eliminating the need to time the SIP investment and helps you to reap higher returns due to the power of compounding.
2. Build a diversified portfolio
Adopting portfolio diversification strategy is one of the most effective ways of generating optimum risk-adjusted returns, given that it allows you to spread your investments within/across various asset class, fund house and investment style. Keep in mind that your asset allocation and selection of funds should be based on your risk appetite, investment horizon and financial goals.
Many investors commit the mistake of considering duplication as diversification and this often results in formation of an inefficient portfolio. Diversification is aimed to reduce the overall risk by investing in different asset classes or fund houses. Duplication, on the other hand, occurs when a portfolio contains similar type of securities that neither offer any diversity to the investor, nor do they reduce the overall risk of the portfolio, with the returns also remaining average.
3. Invest through direct plans
Instead of giving away a part of your returns in the form of brokerage or commission to agents/brokers and thereby reducing overall earning, you should consider opting for investing in mutual fund through direct plans. This allows you to buy mutual funds directly from the fund house through AMCs or online websites.
Direct plans outscore regular plans, as they provide lower expense ratio and hence higher returns and a higher NAV (Net asset value). Moreover, online financial marketplaces such as Paisabazaar.com provide personalized advisory services, fund recommendations, market insight and various tools and calculators to assist customers in taking the right investment decision.
4. Periodic review and rebalancing
The main objective of building a diversified portfolio is to ensure you stay on track to fulfill desired financial goals on time. Periodic review and rebalancing assist your investment in remaining active as per the changes in market conditions.
Your work doesn’t end when portfolio gets created. You must review the portfolio at regular intervals, to analyze the chosen funds’ performance and take corrective actions in case the funds are drifting off track. Also, it may require rebalancing due to changes in financial goals or change in your risk appetite as you grow older or due to certain unexpected life events.
To evaluate a fund’s performance, you need to regularly compare the current fund’s performance with the benchmark indices and also with other funds in its category. Consider exiting funds which have been either under-performing consistently for 2-3 years or have changed their management style/fund managers. You can also switch to other better performing funds to ensure that your corpus’ creation remains on track and isn’t hampered due to funds’ under performance.
(By Manish Kothari, Director & Head of Mutual Funds, Paisabazaar.com)