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6 Wealth Building Tips

6 Tips for Mutual Fund Investment

With India becoming the 5th largest economy in the world, the mutual fund industry has also experienced an upward trend. In the last 10 years, the mutual fund AUM has grown from a meagre Rs 8.26 lakh crore as on 31st December 2013 to Rs 50.78 lakh crore as on 31st December 2023 (Source: AMFI). The growth of the industry serves as a testament to the growing number of mutual fund investors and the demand for the product. The accessibility and affordability of mutual funds have made it a beloved product for investors. However, whether you’re a seasoned investor or a novice, there are certain things that an investor must consider for optimal results. This blog explores 6 things one must consider before investing in mutual funds.

Key Considerations for Mutual Fund Investing

  1. Financial Needs and Risk Tolerance

    Similar to a game of cricket where players strategise to achieve a common objective, i.e. winning the game, your investments also require a clear direction towards their ultimate destination. When investing in mutual funds, it is important to clearly define your financial needs and the purpose of your investment. It is important to assess your risk profile based on your risk tolerance and risk capacity.
  2. Diversification and Asset Allocation

    As the famous adage goes, “Don’t put all your eggs in one basket.” It is important to spread your mutual fund investment across different asset classes to mitigate risk and enhance potential returns. By understanding your risk profile, you can efficiently choose an optimal asset allocation to diversify your risk.
  3. Investment Horizon

    Investors, in general, hold a negative perspective towards equity. While equity is volatile in nature, it is important to note that in the long run, equity grows. To fulfil financial needs and build wealth, you should stay invested for the long term. In the last 25 years, if you had invested an equal amount in all available equity mutual fund schemes, summing up to a total of Rs 1,00,000, then the current value of this investment would be Rs 34.90 lakh, an exemplary return of 15.26%. (Source: Ace MF, for the period Dec 1998 to Dec 2023.)
  4. Start an SIP

    A systematic investment plan (SIP) allows you to invest a predetermined amount at periodic intervals. This systematic and disciplined approach to building wealth is highly accessible and an affordable investment strategy, especially for retail investors. With SIPs, you can build a roadmap to fulfil your financial needs. SIPs harness the power of compounding, which can lead to exponential growth in the long term. Clubbing SIPs with a periodic top-up can furthermore accelerate your wealth-building journey.

    If you start an SIP of Rs. 8,600 to buy a house of Rs. 1 crore, then you will be able to do so in 20 years. But, with a top-up SIP of a meagre Rs. 1000 a year, you can do this in just 17 years. (Assumptions: SIP start date 10 Jan 2004 and Returns calculated as per Sensex TRI; Source: Ace MF)
  5. Portfolio Reviews

    Once you have invested in mutual funds, it is very important to review your portfolio on a regular basis. This will help you to track your progress towards the fulfilment of your financial needs. Moreover, you can check if your investments have deviated from their path and take corrective actions to get back on track to fulfil your financial needs.
  6. Seeking Guidance

    As of December 2023, there are about 45 mutual fund houses in India (Source - AMFI), with hundreds of schemes lying in different categories. Even if one has knowledge about investing in mutual funds, one might lack the time and resources to research all these schemes. Distributors are experienced individuals who hold the knowledge and resources and can guide you to make the right investment decisions based on your financial needs and risk profile. Moreover, mutual fund investing is not a ‘one-size-fits-all’ endeavour. A mutual fund distributor can provide tailored guidance and help you succeed in your wealth-building journey.

To conclude, investing in mutual funds is beneficial for fulfilling financial needs and building wealth in the long term. A long-term investment in mutual funds can leverage the power of compounding and help you build generational wealth. Following these 6 simple tips can help you become a disciplined and consistent investor under the guidance of a mutual fund distributor. Embark on your wealth-building journey now with these tips!