Starting your investment journey young is a good thing. It is only when you start younger you can adapt better. But, what exactly is starting young? You cannot practically start investing in real estate and spending lakhs on buying property, can you? If it is not a big thing, it could be government schemes and bonds. But, they are comparatively a little lesser in returns. What are the next best options that you can get your hands on? Without a doubt, it could be mutual funds.
What are Mutual Funds – Explained?
The mutual fund is a professionally managed pool of securities that is dedicated to a certain investment strategy or asset class, such as stocks, bonds, and/or other income vehicles. The mutual fund firm collects money from shareholders who purchase shares in the fund and invests it on their behalf. A share is a fraction of the holdings of the fund.
What is the Benefit of Investing in Mutual Funds?
- Mutual funds provide investors with a simple approach to diversifying their portfolios because they can invest in a broad range of bonds and stocks.
- A cost-effective option to invest in a variety of companies without having to pay transaction fees for each stock held is through mutual funds.
- The fund’s strategies are decided by skilled investment teams, who also conduct investment research, execute trades, and track the success of the fund.
How Does a Mutual Fund Work?
Mutual funds are not like you directly investing in the stock market; you are investing in a pooled asset. This means it’s cheaper, easier, and with lesser risks. Let’s look at it through an example. If you want to invest in Franklin Templeton shares, it is much more expensive and riskier. But, when you invest in the Franklin Templeton mutual fund through an asset management company, you have comparatively lesser risks and more opportunities.
How to Start Building a Mutual Fund Portfolio?
It is not a hard job to build a robust mutual fund portfolio, and all you need to do is follow these simple steps:
1) Outline Your Goals: The best strategy to build a portfolio is to link your investments to your financial objectives. Your objectives may be short-term, such as booking a quick trip or cruise, buying a car, etc. They could also include long-term investing objectives, such as accumulating wealth, protecting capital, reducing taxes, or preparing for retirement. Once you are clear on your investment objectives, you may create your portfolio to achieve your goals.
2) Understand your Risks: Clearly define your needs and expectations before selecting mutual funds. Choose the investment instrument that is right for you because different investment vehicles have different uses. For instance, although some funds extend respectable returns and are better suited to risk-averse investors, others extend stronger market-linked returns but carry higher levels of risk.
Choose a time horizon after determining the end goals for your investment. For instance, your time horizon would be 25–30 years if your objective was to establish your retirement corpus. The power of compounding can considerably help your investment if you make such a substantial long-term commitment.
3) What is the Magic Number of Mutual Funds You Need to Invest In: It’s not a good idea to have 10-15 fund schemes in your portfolio when deciding how many funds you should invest in. Investors need to recognize that diversity only works when your portfolio is made up of many fund categories.
A portfolio containing a variety of assets helps maintain the overall portfolio return through diversification. The stability of large caps can protect your investments if mid-caps see a decline. Consequently, an ideal portfolio would have three to five schemes with a range of market capitalizations and asset classes.
4) How to Select the Right Fund: The time has come to choose funds. For the same fund category, various Asset Management Companies (AMCs) may offer different returns. This is dependent on the businesses that the funds have invested in and the fund manager’s level of knowledge. Before investing in a fund, take the expense ratio into account as well. The cost incurred to manage the fund is represented by the expense ratio. The rewards that are available to you as an investment increase with decreasing expense ratio. Due to compounding effects, the costs could eventually reach lakhs.
However, there are two main disadvantages to investing in mutual funds, and you would have to know them before you get started:
- Since portfolio managers are unable to guarantee the fund’s success, there is a chance that investors will lose their initial investment capital.
- Diversification in a fund occasionally can reduce beneficial returns. For instance, the fund’s overall return might not change if one stock in the portfolio doubles in value.
But every coin has two sides – and in order to enjoy the benefits of mutual funds, you would have to face a small number of risks, and the ones that you can come over quite quickly.
Final Thoughts
Investing in mutual funds is a great way to diversify your portfolio. When you start investing in gold, bonds, FDs, and more – mutual funds are a great start to your investment in the long run.
