Mutual Funds are one of the best investment plans, which are professionally managed investment schemes that assist in providing highest returns compared to any other investment options. In Mutual Funds money from several investors is pooled by an Asset Management Company (AMC) and invested in different instruments such as debt, equity and money market securities. Asset Management Company (AMC) returns the resulting profit after making deductions to the investors as dividends or capital appreciation.
A good mutual fund can fetch you higher returns on your investments. There are several ways available where you can make your investments and get good returns. But, once you decide to make your investments in mutual funds, then you should choose a scheme that can get you higher rewards. Following are some points listed that one should keep in mind before investing in mutual funds that can help you become rich in India by investing in mutual funds for a long term.
Risk tolerance based on Investment:
To make investments in Mutual Fund, you first need to understand the options that are available for you to invest in Mutual Funds. It includes:
- Equity: Equity funds can be invested exclusively in the form of stocks of domestic companies listed on stock exchanges. Equity Funds are categorized as high-risk funds but can get you high returns as well.
- Hybrid or balanced: Investors can invest in a hybrid or balanced funds by investing in both fixed-income securities (debt) and stocks (equities), thereby offering a balanced portfolio to investors. In some of the cases, the proportion of debt is higher than equity and in some cases; it is the other way round. In this way, the returns and risk involved are balanced out. Hybrid funds are typically balanced or moderate risk funds.
- Debt: Debt is funds that are considered as an alternative to Fixed Deposits. These funds can be invested in fixed-income securities and debt instruments like company debentures, government bonds, and other fixed-income assets. Debt funds are considered to be safe investments and provide fixed returns. Debt funds are typically low-risk funds and provide low returns if compared to equity.
- Money market: Money market funds are primarily meant for investors who are looking for easy liquidity and returns in a short span of time. Investors can invest in money market instruments such as Treasury bills (T-Bills), Commercial Papers (CPs), Repurchase Agreements (Repo) and government securities. These are categorized as low-risk funds in comparison to equity and can get you low returns.
Mutual Funds can also be categorized based on the structure if they are open or close-ended:
Open-ended: You can redeem the investment in these funds at any point in time and get your money within a few days. Open-ended funds are open for purchase and redemption throughout the year.
Close-ended: These funds come with fixed maturities and money cannot be withdrawn from them before maturity. Close-ended funds can be purchased only during the initial offer period and offer can be redeemed at a specified maturity date.
Methods of Investing in a Mutual Fund:
The primary two ways of making an investment in a mutual fund is SIP and lump sum. SIP (Systematic Investment Plan) investment is a recurring investment whereas a lump sum investment is a one-time investment.
SIP: SIP investment is a more disciplined form of investment where you need to save money every month. The monthly investments are automatically deducted from your bank account and invested to the selected equity mutual fund investment, on a specific date, and for a specific duration. In SIP, you will continue investing in markets at higher levels as well as lower levels, which get you a weighted average return.
Lump Sum: A lump sum investment is considered when the investor has a big amount of money to invest at one go into a chosen equity mutual fund. Lump sum investment is done by more educated investors with the help of a financial advisor, who come with a better understanding of the market and current valuations. Lump sum investments earn well when market and share valuations are low.
Keep the following 5 points in mind to become rich by investing in mutual funds for a long period of time:
- Check the performance of the mutual fund scheme before selecting the best mutual fund available.
- Make investments in mutual funds according to your financial needs and goals. If your aim is to achieve long-term returns and willing to take high risks, you can invest in mid-cap and small-cap funds.
- You can invest through Systematic Investment Plan (SIP) in mutual funds. SIP helps you to invest specific amount every month/quarter into a specific mutual fund scheme.
- When markets are low, generally NAV of the mutual fund will be low and underlying stock prices would fall. One should invest lump sum during such market conditions.
- Contact mutual fund advisor mutualfundwala for any information about mutual fund investment.