With each passing year, the Indian market is becoming more and more volatile.
Despite the growing inflation rates, the interest rates are going down. In this uncertain economy, investing for higher return has become a big challenge. Indian Investors are becoming more growth and return focused. The only challenge is finding long term reliability.
Enter the Mutual Fund Investments.
Mutual Funds are one of the most popular investment vehicles in India. They come in a wide range of varieties; to suit the varied financial goals and needs of mutual fund investors.
So how can you choose the right ones for your financial goals?
How can you become a successful mutual fund investor?
Table of Contents:
- Why Mutual Funds for Successful Investors?
- A Simple Guide for Successful Investors
1. Diversified Portfolio Risk
2. Professional Active Management
3. Multiple Choices To Invest
4. Affordability of Mutual Funds
5. Liquidity of Mutual Funds
1. Put Your Financial Goals First
2. Consistency vs Performance
3. Monitor Your Investment portfolio
4. Restructuring Your Mutual Fund Portfolio
Wanting to become a successful investor needs no reason or explanation. You have dreams, financial goals and you are out to achieve them. But how you go about it requires solid reasoning.
Are you a mutual fund investor because of the hype?
Or because of some “expert’s” persuasion?
They are reason enough to get you started. But if you are investing only because of external reason, you may not become a successful mutual fund investor.
Investing for your financial goals like your child’s education or wedding or buying a house are long term commitments. It demands years of discipline and commitment from you as an investor. And you can’t maintain such discipline if you are doubtful about your investment choices.
Hence to become a successful mutual fund investor, it is necessary to know why you do it.
Why Mutual Funds for Successful Investors?
Rated as the most profitable investment vehicle in India, Mutual Funds walk the fine line of higher returns and mitigated risks.
Two things make it so; one is the nature of mutual funds, and the other is the strict regulations of SEBI.
I’ll list down the inherent advantages by explaining how it works on the inside. And why you must have them in your portfolio. Hopefully, it will give you a better understanding to make informed investment decisions.
Here’s the list of advantages of Mutual Funds for every successful investor:
1. Diversified Portfolio Risk:
“Investing in Mutual Funds” means you are buying the units of a mutual fund scheme to sell later at a higher price.
But even though the equity mutual funds invest in stocks, their units are not the same as stocks. They are inherently diversified since they are a collection of different stock.
A single unit will have different proportions of different stock’s value. The underlying stock holdings of that particular mutual fund scheme decides this value proportion in each unit. See the image below for a better understanding of the diversified nature of a mutual fund scheme.
Mutual fund investors reap the benefits of diversification as it invests the money across various companies and sectors.
For example: In the image shown above, a single unit invests across different sectors like Banks, IT Services, Automobile, FMCG, Energy, etc. In this case, even if some of these companies perform poorly, many will outperform the index to give you index beating return.
This investment strategy of mutual funds lessens the exposure to risk as compared to the direct stock investment. And the best part is that investment professionals do this diversification.
It brings us to the next advantage of investing in mutual funds.
2. Professional Active Management:
Mutual Fund Investments are under the management of skilled professionals. They are the Fund Managers.
Unlike with an Index Fund, a fund manager employs his investment strategies in an actively managed fund.
They evaluate the stock with the help of all the resources at their disposal. And also the corporate governance of the underlying company.
Since a fund manager brings in crores of rupees, a company’s executives give special attention to the fund managers. A fund manager can meet with the finance manager of a company to discuss their plans. It gives them access to valuable inside information to make an informed investment decision.
On considering these factors, your funds are in safe hands. They are experienced investment professionals capable of taking balanced and informed decisions.
By actively managing in this manner, mutual fund managers try and outperform its index consistently.
However, despite a unique investment strategy, they are bound by the fund’s benchmark index. It is not a limitation but an advantage.
How could it be, though?
Restrictions allow innovation.
Here, it helps create different mutual fund schemes and cater to investors with different risk tolerance levels. A lack of options is never a concern in mutual funds.
3. Multiple Choices To Invest:
Equity funds, Debt funds, and Hybrid funds are the trinity of mutual funds.
Mutual fund investors have a range of mutual fund scheme option to choose from each of these categories. You can shortlist the right kind of fund to invest in based on your investment requirement.
See the image below.
These are the mutual fund schemes widely used by successful mutual fund investors in India. You can choose any of these schemes that fit your mutual fund investment strategy to become a successful investor.
Even though these are enough for any mutual fund investor, there are other kinds for special needs. Some of those are money market funds, arbitrage funds, fund of funds and others. These are outliers that do not strictly fall into any of the 3categories mentioned earlier.
A successful mutual investor will choose a mutual fund scheme based on the investment horizon and their risk tolerance level. But investment horizon and risk tolerance are not the only factors that influence an investor’s investment decisions.
From the investor’s perspective: one other significant factors is affordability.
“I don’t earn enough.”
“Investor life is not for me.”
If anything like this is holding you down, prepare to break that barrier.
4. Affordability of Mutual Funds:
If you can afford ₹100, you can afford to invest in mutual funds.
With mutual funds, you can start investing with a sum as low as ₹100 in a scheme.
Time is money. An investor can’t afford to lose time contemplating over to be or not to be an investor.
Pick your financial goal and choose the right mutual fund scheme to invest in it. Start small. You do not have to worry about waiting until you get that bonus.
Ideal for first-time investors:
Maybe affordability is not an issue for you.
You are probably just doubtful whether Mutual Fund Investment is for you or not. Even in such a case, you can start small by investing in hundreds.
As a beginner investor, you may take a while to adjust to mutual funds. You will be prone to make mistakes because of the transparency and control you have over your mutual fund investments. The volatility of the equity market can trigger your emotional response, typically fear of loss.
Says Benjamin Graham, father of value investing, in his book The Intelligent Investor.
Since you start with small amounts in mutual funds, you have a margin of safety. As a rookie, the damages of learning errors and uncertainties will be insignificant compared to other investment instruments.
Moreover, you can course-correct your mutual fund investment strategies, unlike other investments.
Investments like FDs or Gold or Real Estate or Investment Insurances, ULIPs, require good enough capital to invest in them. And they are often an irreversible long-term commitment.
But mutual funds have the advantage of high liquidity.
5. Liquidity of Mutual Funds:
Mutual Funds are one of the top 3 assets with the highest liquidity.
It’s not only that you can redeem your mutual fund investments at any time. It is also about the control you have over it to redeem in portions and keep the rest invested to grow.
For example, let’s say you have an investment of ₹3lakhs in a mutual fund scheme. You require ₹1lakh in a few days for some unavoidable expenses.
In this case, you can redeem only ₹1lakh by selling the equivalent number of mutual fund units.
It is one of the shortcomings of other investment instruments like FDs and Insurance investments. Even Gold, despite highly liquid, cannot be sold in portions as needed because of the physical restrictions. Only stocks and mutual Fund investments have this liquidity advantage.
Note: For gold exposure, you can invest in gold mutual funds with the same liquidity advantage.
Liquidity for Better Returns:
The liquid nature of the mutual funds naturally compels the fund managers to perform better than their peers.
High liquidity lets the investors switch to a different fund if a fund’s performance declines. Whereas in other investment insurances, your funds are locked-in until maturity. Regardless of how much your investments make, you get only the “guaranteed bonus” with them. It is one of the reasons mutual funds deliver far better returns than any endowment plan or ULIP.
A Simple Guide for Successful Investors
Investing in mutual funds is not a child’s play.
Your investment discipline is a reflection of your attitude towards your financial goals.
So how to invest in mutual funds?
What are the best mutual fund investment strategies to become a successful mutual fund investor?
Starting small is key. But building over it to create a solid investment portfolio of mutual funds requires knowledge and a certain level of expertise. There can be umpteen number of tools, ideas and designs that you can incorporate into your mutual fund investment strategy. Often, the model of your mutual fund portfolio is a reflection of individual choice. Yet again, there are a few factors that are consistent across different investment strategies in mutual funds.
Here are the factors to guide you in building a solid investment portfolio:
1. Put Financial Goals First:
Your financial goals are unique to you alone.
Chart your investment portfolio based on them.
You may have goals like owning a dream house, a BMW M Class, or planning for your child’s higher education. To achieve them, you must assign your long-term, medium-term and short-term goals to each of your investment funds.
An effective mutual fund investment strategy is to identify your financial goals and invest for them regularly. The type of mutual fund schemes you choose should be as per the time horizon of the goals you’ve set.
For example, you cannot invest in an equity mutual fund for your short-term financial goals (0-3years horizon). The equity market is volatile, and it risks your capital in the short-term. A short-term debt fund would be ideal for your short-term financial goals.
On the other hand, if your goal is long-term with a 5-7+ years horizon, an equity mutual fund is ideal. Equity mutual funds give an excellent return for your investments over the long-term.
Hence, it is necessary to set your goals first and then invest your savings in the appropriate fund.
2. Consistency vs Performance:
“Best!—Do Not Mean Right”
After setting your financial goals, it comes down to choosing the right funds for them.
“Right fund” is a keyword here, in contrast with the “best fund”.
On the outside, the fund with the highest returns might look like the best option. It is only logical. But a consistently performing asset is always better.
Anyone can slog and score in T20 cricket, but only the skilful players win test matches. Equity Mutual Fund investments are much like test matches; they are long term. The skill you need to look for is consistency over the years rather than performance in volatile conditions.
For example, see the table below:
From the table: Fund A has outperformed Fund B in the range of +5% in the past 6months and 1 Year. Indeed, they are stellar returns. But that shouldn’t be your only reason to invest in Fund A.
Expand your horizon to see if it has performed consistently. Looking at the 3, 5 & 7 years returns we can assess that Fund B is more consistent than Fund A.
Even though Fund B is not a bad performer—a 16% 7Year CAGR is right above average—it is less consistent than Fund B.
The key to becoming a successful mutual fund investor is an inclination towards consistency rather than quick profits.
3. Monitor Your Investment Portfolio:
You have set your financial goals; you are investing for them.
Is it time to sit back and relax?
Yes, but no.
Investing in mutual funds does set your financial goals in motion. Your probability of achieving it has increased, and you don’t need to put much effort into it now. So yes, you can sit back and relax.
However, you need to review your investment portfolio at regular intervals. You monitor its progress to identify whether it lags or exceeds your expectations. Most people assume that once you invest, safeguarding the investment is the responsibility of the fund manager.
It is a dangerous assumption, remember that it is your money, and you need to ensure it is on the right track. But a mutual fund investment does not require daily monitoring like a stock investment.
Review your mutual fund investment portfolio once every 3 months. Or at least twice a year. It isn’t demanding work, pretty much like watching over your kids playing in the park. Just to make sure everything is right and safe.
When you review your investment portfolio, appraise how your mutual fund investment has fared against its benchmark. If it has outperformed its benchmark with not much volatility, tweak your portfolio as necessary. If there’s a drop in its performance, find out the reason and decide whether you should switch or not.
Whether you make any significant change or not, it helps in two ways. One is that it makes sure you are on the right path to becoming a successful investor. Secondly, it makes you mentally more focused and more intense to achieve your financial goals.
4. Restructuring Your Mutual Fund Portfolio:
Given that you have done the basics right, it is a rare possibility you’ll need significant restructuring.
Nevertheless, if you notice your portfolio needs restructuring, work towards it immediately.
A few pointers for you on Restructuring of your Investment Portfolio:
a) Switching Between Mutual Funds:
If the fund has been underperforming, shift it to a better performing fund. But make sure you follow the same fundamentals while doing so. Picking the right mutual fund is your primary objective.
One significant area where investors seem to lack clarity is: deciding the right time to pull the plug on a fund.
You know that the equity market is volatile. It is common for an equity fund to go into the negative return territory.
So when should you switch from a mutual fund scheme?
Before you decide to switch, you must go through a few reasoning to make sure you are making the right decision. It is because the equity market can sometimes be deceptive with its out-of-context numbers.
Here are the questions you must ask and answer them with hard facts before switching to a “better” fund:
i. Has the stock market suffered a drop as a whole?
ii. If not, has the fund’s benchmark index suffered a drop?
iii. If not, did your fund outperform its benchmark?
iv. If not, is there a change in the fundamentals of the fund?
v. Has the underlying portfolio changed significantly?
vi. Or a change of fund manager?
Lookup facts, answer these questions with absolute reasoning. By the end of it, you will have your answer on whether to switch funds or not.
On the other hand, you may simply want to switch to a better performing fund. It may be equally consistent over the years.
In such a case, check for the tax implications on switching.
Is the additional 1% or 2% return worthy enough of the STCG or LTCG taxations @15% or 10%?
After this analysis, switch to that better performing fund only if the unbiased evidence supports your decision.
b) Rebalancing your portfolio:
Your investment portfolio has a cash flow in or out of your portfolio all the time.
Now add the volatile nature of the equity market to your investment portfolio. There is a greater chance your portfolio’s asset allocation ratio will fluctuate out of shape.
Successful mutual fund investors manage their investment risk is through asset allocation rebalancing. It is a powerful tool in their mutual fund investment strategy. It helps them stay in their circle of competence when it comes to investment risk management.
Portfolio rebalancing is essential if your asset allocation ratio stray away from the original allocation plan. However, rebalancing too often is not ideal either, as it has further tax implications. And remember, transaction costs are associated with it as well.
You can rebalance your portfolio by rebalancing the asset category that strayed from the intended asset allocation strategy. It also helps in ensuring that the portfolio sustains at your risk tolerance levels.
Discover The Rewarding Nature of Portfolio Rebalancing in this article. The article explains how much of a powerful tool asset allocation rebalancing is, in detail with examples.
c) De-risking Your Portfolio:
In each category of mutual funds, you can diversify further.
For example, in equity funds, you can diversify across the market capitalization by investing in Large-cap funds, Midcap funds, Small-cap funds and Flexicap funds.
Typically Midcap and Small-cap funds are much riskier than Large-cap fund. However, they also have the potential to return better returns. Meanwhile, a Flexicap—also called Mutlicap—fund invests across companies in all market capitalizations.
If you are an amateur investor, investing by yourself, a Flexicap or a hybrid fund will be more suitable for you. But investing with the help of an investment advisor is best if you want to earn optimal returns.
d) Never-ending Process:
Other than choosing to invest the first time, the rest is a never-ending process in a successful mutual fund investor’s life.
Even though a few things subside, there is one thing that requires your consistent attention. It is your financial and investment awareness.
Educate and enlighten yourself about constructing a mutual fund portfolio. You will soon learn the elegance to decide the best investment option for yourself.
See this as an opportunity to improve your temperament. Build and restructure your investment portfolio to reflect your investment philosophy. Even though the stock market is all numbers, it’s only a reflection of investors’ collective investment philosophy.
Actively partake in discussions and meetings with your financial advisor. Ask questions to your financial advisor and learn from them.
Two thinking minds are always better than one.
The things you have learned are the foundations, the fundamentals to become a successful mutual fund investor.
Apart from this, you will need a comprehensive financial plan to become a financially successful person. After all, the only reason to become a successful investor is to become well-off financially. You do it by achieving your financial commitments and dreams and attain financial freedom.
For a custom financial plan or investment-related advice, you should book your FREE consultation call with a CFP now. Click “Register Now” below!