Moneycontrol
Mar 22, 2018 02:44 PM IST | Source: Moneycontrol.com

Mutual funds can be handy for growing wealth - 3 tips to invest wisely

You can start an SIP in multiple mutual funds with varying amounts.

Harsh Jain

For those who invested wisely, mutual funds have generated immense wealth over the past two decades. Some of the best mutual funds have returned over 20% per annum even for as long as 20 years.

If you wish to grow your wealth, careful planning and investment can do wonders.

You must always keep these three tips in mind while investing in mutual funds.

Regular investment: It is wiser to invest in mutual funds on a regular basis. This can be done via Systematic Investment Plans (SIP).

SIP is a monthly investment of an amount chosen by you, in a mutual fund of your choice. The money gets automatically debited from your account and invested in the mutual fund. You can start an SIP in multiple mutual funds with varying amounts. Usually, the minimum amount for investing in SIP is Rs 500 per month. Further, an SIP can be stopped at any time you wish.

The reason SIP is a good method is because it takes advantage of cost averaging. The markets keep going up and down from time to time. And so do mutual fund returns. However, timing the market - investing when markets are down and about to go up - is very difficult. For this reason, regular investing is very helpful.

When you invest regularly you need not worry so much about market conditions. When the markets are down, you get more mutual fund units for the same amount. When the markets are up, you get fewer mutual fund units. In the long term, the price you pay for mutual fund units is an average of the price during ups and downs. This way, you ensure that you do not pay a very high price for your investments.

However, if you have a large sum of money to invest one-time only, it does not make sense to sit with the money and start gradual SIP payments. For investments like these, there is a better option - Systematic Transfer Plan (STP).

What you essentially do is invest all your money one-time in a low-risk debt mutual fund. From this, you gradually move your money to a higher-risk, higher-return equity fund.

It is like starting an SIP with one difference - the investment amount gets deducted from a debt mutual fund instead of your bank account. So you ensure that your money is earning the rates offered by debt funds while it is being gradually moved to an equity fund.

This way, you can reduce the risk of investing in equity mutual funds by spreading your investments over a larger period of time.

Long term investing: Mutual funds provide the best returns when invested in for very long durations. It requires patience. Often, many investors panic and withdraw money the moment returns are lower than expectations. This has very often proven to be a wrong strategy.

Many novice investors invest when the markets are doing very well and withdraw the moment markets perform poorly. When invested in a mutual fund, always look at its long term performance, like its 5 year returns. That will give you a good idea of the kind of performance it achieved through good and bad times.

For example, if you invested in 2007, and checked your returns in 2009, you would have made losses. This is because 2008 witnessed a global markets crash. Many investors exited at this point. However, if you had remained invested, you would have not only made up for the loss but made stellar returns by now. This is not to say that remaining invested is always the best strategy. But panic decisions are certainly a poor strategy.

By investing for the long-term, you allow your investment to be subjected to compounding. Compounding really is incredible! Whatever you invested will grow in some period of time. That grown amount will further be invested and get higher returns. And this cycle continues. So the longer you remain invested for, the more exponential the growth gets!

Starting an SIP for the long-term then is a wonderful initiative to ensure long-term wealth generation.

Rebalancing: As mentioned earlier, mutual fund returns depend on market conditions. There is no way you can invest in a particular number of funds and completely forget it for a long period of time. And it isn’t always the market conditions. Many times, the particular fund you have invested in might start performing poorly while others in the same category give better returns.

One very convenient way to check a mutual fund’s quality is to look at its ratings. Many online sites give ratings to nearly all mutual funds. If you have invested in a mutual fund whose rating has gone down, it might be time to switch mutual funds.

To sum it all up, growing wealth using mutual fund involves these things - regular investment, staying invested for a long duration, and routine re-evaluation. Investors who followed these steps in the past have grown their wealth many times over with minimal effort!

This article is written by Harsh Jain, Co-founder & COO, Groww
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