Take the first step towards your thriving future by investing in mutual funds!
A mutual fund is a financial instrument that pools the money of various individuals (investors) and invests in different securities such as stocks, bonds, and short-term debts. All mutual funds that an investor holds is known as their portfolio.
To understand the concept of mutual funds easily, let’s assume a box of 12 different doughnuts costs ₹ 60. A group of 3 friends decide to buy that box of doughnuts, but they have only ₹ 20 each. So, they pool in the money and buy that box. Now according to their initial investment, they all get four doughnuts. Similarly, a mutual fund also pools money from different investors to invest or buy various securities, and you get whatever is the outcome based on your initial investment.
Mutual funds mainly got popularized in the last two decades because of the high returns it has been providing to all the investors. It has proven itself as one of the best ways of investing. It allows your money to grow with compounding every year, however, one must remember that mutual funds are always subject to market risks. Therefore, avoid investing in any fund based only on its past performance and do thorough research.
Here are some tips to maximize your mutual funds’ returns:
There is an unwritten rule of investment that you should never invest all your money in a single instrument. The same applies to mutual funds as well. To maximize your return and lessen the risk, you should avoid putting all your money in a single mutual fund. Diversify your investments because a single fund cannot always perform the best. For instance, equity funds work well in the consistent market, but, as soon as an eruption begins, it starts going down; on the other hand, gold funds do well comparatively during any disruption.
To get the maximum returns, starting as early as you can prove highly beneficial. Begin with Systematic Investment Plans (SIPs), as it allows you to invest in small amounts reducing the burden of lump sum money. Many equity funds let you invest through SIPs with as low as ₹ 1000 (₹ 500 in case of ELSS). Moreover, the regular & automatic deduction of money builds investment discipline.
You should always pay close attention to how the market is performing as it gives you a chance to top up your SIPs. For example, during COVID-19, the financial markets went through some corrections. A wise investor would have known that it is an opportunity to build long term investments. So always be ready to invest as and when you can, to get high returns.
The main reason behind long term funds delivering higher returns is compounding. Your money keeps increasing throughout the time frame, based on interest rates applicable. A simple piece of advice that works in financial markets is whatever you could not achieve during a bullish market can be achievable with compounding.
Last but not the least, always keep reviewing the performance of your funds. Doing so will allow you to compile all your investments; you can rectify funds that are consistently performing poorly (if any). Also, these regular analyses are very crucial for all the financial goals that you have set. You can always fix a new aim based on how your funds are performing.
Investment is key to a prosperous future; however, stay aware of where to invest and how much. Also, mutual funds are not always fruitful; their performance is entirely market dependent. Therefore, you should not panic during the market correction period, as it can dilute a potential flourishing investment.