When we conducted the Aspiration Index Survey to understand the personal finance habits of millennials (salaried men and women in the age group of 25-35), there were some interesting revelations. As per the study, 91% millennials manage their own wealth and are big on saving and investing. Their investments are spread across the spectrum from FDs to mutual funds, and acquire one-third of their wallet share.
It was interesting to see millennials inclined towards mutual funds. And why not? They are one of the top options for creating wealth through stocks and bonds markets. They’re especially suited to first-time investors unaware about investing directly in the stock market.
Mutual funds are investment schemes where in a group of investors come together to buy stocks, bonds, deposits, gold and other securities. There’s a mutual fund for every kind of investment – be it short-term, medium-term or long-term. Mutual funds have expertly managed by fund managers who take investment calls on your behalf. They charge a commission for their services.
If you are in the 25-35 age bracket and are investing in mutual funds to create wealth, here are a few pointers to simplify the process and avoid any mistakes.
Define A Goal
Investing without a clear goal in mind or clear purpose is a waste of your time and efforts. When you define short- and long-term goals, you have a definite target in mind and this makes it easier for you to understand when and how to invest in mutual funds. Your goal can be anything – from buying a car to saving up for your child’s education.
Understand Your Risk Appetite
If you’re a first-time mutual fund investor, either you prefer playing it safe with your choice of instruments, or you’re just beginning your investment journey. Either way, once you identify how much risk you can absorb comfortably, you can choose a type of mutual fund. Liquid mutual funds or short-term debt mutual funds are ideal if you want to have a high degree of capital safety as possible as they are known to offer lower, steady returns. On the other hand, equity mutual funds offer higher returns but carry proportionately higher risk as well.
Choose Funds Smartly
Once you decide whether you want to opt for debt or equity mutual funds, don’t pick one at random. Do your due diligence to curtail risk and maximise the scope of earning high returns. Look at the ratings given to mutual funds and their performance over the past five years before picking one. Also, you don’t have to pick a fistful of mutual funds to invest. Given the fact that each mutual fund has several underlying stocks, even if you pick three mutual fund investments, you’re in good hands.
Stay Invested For The Long Haul
Mutual funds offer you best returns when you stay invested for a minimum of 3–5 years, if not longer. This is because of the power of compounding and the market’s volatility. Equity and long-term debt funds especially are erratic in the manner in which they offer returns, which is why it makes sense to say invested for several years at a stretch. This will balance out the highs and lows and give you stable returns. If you are investing for your immediate future, consider short-term debt mutual funds for safety of capital and moderate returns. More importantly, to maximise your returns make it a point to choose the growth option. Here, your profits benefit from compounding, thereby offering better returns.
Choose Between One-time And Regular Investment
Mutual funds are flexible in the way they allow you to invest, which means you can either invest a lump sum amount or invest a fixed amount each month through a Systematic Investment Plan. If you want to put your gratuity to good use, for instance, you can go the lump sum route. However, if you’re investing in your early 20s when you can only contribute a small amount or you have only a limited amount to divert to mutual funds, SIPs are a great option. As your income/affordability increases, you can increase your monthly contribution too.
To make sure you’re getting the best returns possible, make it a point to monitor them from time to time. This way you’ll know whether they’re offering returns in line with your goals or if you should consider modifying your mutual fund investment approach.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.