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Mutual Fund Investment: Never Take Undue Risk to Achieve Your Target

Even if you do not have a large capital for investing, you can successfully create wealth through the regular investment of small amounts, while keeping in mind your risk profile and financial goals. Even if you are not born rich, the investor's endeavour and instinct will make him wealthy over time.

This guide will help you take your saving habits and inclination towards investment seriously, through controlled spending.

Saving And Accumulating Wealth Over A Lifetime

Wealth accumulation is not a sudden one-time occurrence. It takes place over the years. The secret of getting rich is starting slow and being steady, putting aside every rupee and stick to that habit of small finance planning which can give you a decent return. Over time, compound interest will generate significant wealth.

Take Saving And Investing Seriously

The first step is controlled spending. According to management guru Warren Buffett, it is better to spend the leftover after saving rather than vice versa. 

Steps to Accumulating Wealth Through Regular Investment of Small Amounts:

  1. Early Planning: 

    To begin achieving prosperity, planning must happen first for determining financial goals and ways if achieving such within a certain time frame. It is not possible to get rich overnight, so for significant wealth generation, there ought to be a long term planning.

  2. Saving and Investing Wholeheartedly:

    It is important not to give in to the pull of things that you don't need, for the sake of luxury or peer pressure. Warren Buffett has also warned about the evils of over-expenditure, which results in loss of assets sooner than you realise. It is not enough to save, but wisely investing the saved money for good returns over time is key to getting rich. Moreover, for the magic of compound interest to happen, the investor must begin the process to save and invest as early as possible, with the predetermined ambition of realising the financial goals.
  1. Determining Places to Invest In: 

    Do not take undue risks, rather invest money in something that you understand. Do not put the money in a baffling area. However, the most useful method for making investments of a periodic nature would be to start a SIP in the equities. Equity is currently the only kind of asset class which creates long-term wealth. Systematic Investment Plan or SIP proves to be good during the market fluctuations, because of the inherent benefit regarding rupee-cost averaging.

  2. Diversification of Your SIPs: 

    Investments meant for varied purposes and varying durations of time should not be mixed. Separate SIPs ought to be started at separate times for the fulfilment of separate needs. If you are planning on achieving all of your financial goals through one single SIP, it may just as well end up putting the plans off their track. In the end, you may not be able to meet your intended financial targets. Moreover, the different funds' categories that are designed to meet the respective long-term and short-term targets cannot be put to use interchangeably.

  3. Sticking to Your Investments: 

    Market fluctuations will always be there. Don’t be so worried about their regard, that you end up pulling out all your money. Researching to study as well as understand the factors of risk involved is a prerequisite to investing. A risk will only pose a threat if you do not know the workings of the market. So, decide upon investing only after you have done the relevant research. The investments should continue until the financial targets are close, so that you may reap the benefits arising from compound interest. Trading is not equal to investing and cannot generate wealth, but sticking it out to the end with your investment plans during a long time frame will create significant wealth.
  1. There Is No 'One-Stop Solution’ For Savings or Investment Needs:

    Savings or investment requirements cannot be taken care of without taking note of the background or the risk profile. However, a thumb rule to generally consider would be that, out of the all the possible investments and savings options that are currently available in the money market, only consistently investing in the equity-oriented instruments would be able to create maximum wealth for the investors during a long term.

  2. Three Basic Considerations for Selecting Mutual Funds:

    A proper SIP for mutual fund investment can be chosen based on the following points:

    • The fund house should have a strong track record in global and domestic markets in terms of asset management.

    • Choose schemes with the reasonable corpus. Such as, for Large Cap, it should be around INR 1000 Cr, for Mid Cap INR 700 Cr and Small Cap INR 350 Cr.

    • The scheme should have a consistent track record across the long term with a minimum of at least five years.

  1. Try Not to Time The Market On Your Own:

    While there's growth in SIPs, a lot of investors choose to be at the other end. These investors prefer timing their mutual fund investments for maximising their returns. Some prefer selling off their investments as soon as the markets seem overpriced. However, this strategy does not help for most, except for a few lucky ones. Some investors keep waiting until the markets correct themselves whereas others repent selling their shares at the previous market high.

    Instead, it is more sensible to keep on investing in equity through SIPs during regular intervals and let the money grow across long periods, to overcome the timing risk.

 

  1. Do Not Ignore The Risk Profiles And Necessary Allocation of Assets:

    In case of mutual fund investment in the heady markets, the investors with moderate risk profiles tend to get carried away under peer pressure, and while suffering from the fear of getting left out, they ignore the existing risk profile and end up investing in risky avenues like equity funds. This kind of situation may often lead to huge losses if the market ends up falling sharply, especially in the case when investors go for small and mid-cap schemes, as quick and sharp falls may then evaporate gains that have been earned over a long period. Sticking to one's risk profile and strict adherence to asset allocation pays up in due time.
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Thursday, 09 April 2020

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