Mutual funds are one of the most popular investment tools as they offer portfolio diversification, professional management, tax benefits, convenience, and, most importantly, give you the opportunity to create wealth and achieve your financial goals. Even though mutual funds are easier to handle, there are some golden rules that you, as a responsible investor, should know to make the most of your investment.
On that note, here are the 4 golden smart and practical rules of mutual funds that could help you mitigate your risk and ensure long-term success.
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Diversify your portfolio by following a proper allocation strategy
When diversifying your portfolio with mutual funds, be sure to invest in different assets as well as those that track different indices (such as small cap, mid cap, etc.). For example, your asset allocation might include stocks, bonds, and cash. The goal of asset allocation is to balance risk and return in your portfolio, as different asset classes perform differently at different times. By allocating your money on the right group of investments, you can achieve better risk-adjusted returns.
For example – Equity is a volatile asset class and is suitable for investors with a high risk appetite. Gold is a safe haven asset and is a good hedge against inflation. And debt funds are suitable for investors who are looking for regular income.
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Start an SIP for disciplined investing
An SIP (Systematic investment plan) allows you to invest a fixed amount of money into a mutual fund scheme regularly. Depending on your financial status and investment objectives, you can invest in an SIP for as low as Rs 500 per month or as high as you like. Moreover, you can also choose the frequency of your investment – weekly, monthly, quarterly, etc.
SIP investment mode comes with an advantage of rupee-cost averaging. This means you will buy more units when prices are low and fewer units when prices are high. Over time, this can help you maximise returns and minimise risk. However, it must be stated that rupee cost averaging is particularly effective as a long-term strategy.
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Patience during volatility or uncertainty
When you invest in mutual funds, remember that the markets are constantly changing, and there will be periods of volatility or uncertainty. During these times, it is important to remain patient and not make any rash decisions. The market may eventually rebound over time, and selling shares during a down market can result in missing out on potential gains. Remember, the goal is to achieve long-term financial goals, and short-term fluctuations should not deter you from this goal.
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Do not invest and forget; Review your investments
Reviewing your investments regularly is essential to evaluate their performance and ensure they are still aligned with your goals. Regular portfolio reviews can help you compare your investment to benchmarks and expected returns. This ensures that your asset allocation is where it needs to be. Moreover, when you track your investments regularly, you can re-balance your portfolio to maintain the appropriate asset allocation if some funds are affected by market fluctuations.
Closing thoughts
Mutual fund investment can be a great way to grow your wealth over time—but only if you do it smartly! By following these 4 golden rules, you can avoid some common pitfalls and generate optimum returns by aligning your investment goals with your portfolio.