Your 101 Guide to Leverage Mutual Funds to Build a Wealth
It's clear that investing in mutual funds is a great way to build a long-term portfolio that can meet your financial goals. But how do you go about doing it?
There are no established guidelines for creating a mutual fund portfolio, but it should follow two basic principles. One of these is to ensure that you're investing in a way that's aligned with your goals. The other is to discipline yourself.
Step 1: Analyse your current and future requirements
Before you start investing in mutual funds, it's important that you have a clear understanding of your financial goals. This will allow you to make informed decisions and build a strategy that will meet your needs. For instance, if you have a long-term goal of investing in a retirement fund, it's important that you have a clear understanding of how much you need to invest in order to retire comfortably.
Your asset allocation will be determined by these questions. For instance, you can categorise certain types of funds into long-term goals and debt funds into short and medium-term goals. The most crucial part of this process is to define your objectives in terms of target amounts.
One of the most critical factors you should consider when setting goals is the type of holding you want to have in your mutual fund. For instance, you can have a retirement fund for your long-term goal or a college fund for your daughter's education. Having a clear goal will allow you to monitor the performance of your investments.
Step 2: Deciding between SIP or Lump Sum Investing
This step will help you decide between a lump sum investing strategy and a systematic investment plan. The difference between the two is that the former is more about investing and the latter is more about discipline. With the discipline of investing that comes with the systematic approach, wealth creation becomes a more passive process.
A monthly or phased investment plan allows you to keep track of your cash flows and investments while protecting yourself from the possibility of a cash flow mismatch. Additionally, these types of investments provide an opportunity to earn more by getting more value from the markets when they go up and vice versa.
Step 3: Do your research on various Mutual Funds Schemes
While you're working on building wealth for yourself, it's important that you consider the role of leader when it comes to investing. Before investing in a fund, make sure it's geared toward your goals. For instance, a high-risk fund might not be the best choice for your long-term goal.
There are various types of mutual funds that you can choose from, such as debt funds and equity funds. You can also make a choice between growth and dividend plans.
When it comes to creating a portfolio, you should consider the consistency of past returns over the compound annual growth rate (CAGR). If you're looking for a more tax-efficient option, opt for the growth option instead of the dividend one. However, if you're not sure you can make a good decision, you should consider taking a call from a professional.
Step 4: Diversify Your Corpus for Primary Requirements and Contingency Measures
Satellite portfolios and core portfolios are two different types of investments. The former is for long-term goals, while the latter caters to medium and short-term objectives. Usually, you don't disturb these unless there's a compelling reason to do so.
A satellite portfolio is an opportunistic investment aiming to achieve alpha. It can be diversified across various asset classes such as gold, sector funds, and index funds. On the other hand, you can also shift your focus to debt funds with a view to higher-risk opportunities.
Step 5: Keep Yourself Updated with Fund Performances
Aside from creating a diversified portfolio, it's also important that you regularly review it. For instance, if the market is going up, you should reduce your exposure to stocks and increase your exposure to bonds. Having a regularly reviewed portfolio helps you make informed decisions and keep track of your goals.
A core portfolio should be regularly reviewed to see if it's underperforming the market or the peer group, and red herrings should be drawn if the fund managers are taking on too much risk. You can also judge your asset allocation based on your goals, such as the maturity of your goal. If your goal is for 15 years, then six years is enough time to see if your fund is still on track.
A good mutual fund portfolio is key to achieving your life goals and long-term financial security. It requires a lot of effort and dedication to succeed. Having a regularly reviewed portfolio can help you keep track of your progress and make informed decisions. However, it is not easy for everyone to remain constantly updated with mutual fund schemes and fine-tune your portfolio regularly.
Aim capital Financial Pvt Ltd has expert financial planners that can help you achieve your financial goals in the medium and long term. Connect with our teams today to learn more about Mutual Funds investing.
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