Mutual funds have become an extremely popular and excellent medium for wealth creation in the long term. Although traditional savings schemes like Fixed Deposits (FD) or Public Provident Fund (PPF) provide security, their returns are often not sufficient to beat the rate of inflation. In this context, maintaining continuous investment in mutual funds has the potential to yield higher returns.
According to Santosh Agarwal, CEO of Paisabazaar, the stock market experiences constant fluctuations. Changes in interest rates and fund performance directly impact the investor's investment. Therefore, instead of investing without a strategy, it is crucial to build a robust portfolio aligned with your financial goals and risk appetite. Four simple strategies can be followed for this purpose.
Often, new investors invest by looking only at the funds that have given the highest returns in the last one or two years. This approach can be risky, as a fund that performs well today is not guaranteed to perform the same way or suit your needs in the future.
First, it is important to decide what proportion of your money should be allocated to the stock market (equity), safe options (debt), or gold. This process is called Asset Allocation, whose main objective is to achieve better returns while controlling risk. The correct asset allocation depends on your age, monthly savings, remaining years until the goal, and your risk tolerance.
Putting the entire amount in one place increases the risk of loss. Different assets react to market changes in different ways. For example, when the stock market declines, debt or gold provides stability to your portfolio.
A multi-asset approach can be adopted under diversification, where the entire capital is divided into debt, hybrid, or gold ETFs instead of being invested solely in equity. When investing in the stock market, a proper balance of large-cap, mid-cap, and small-cap should be maintained in the portfolio. Additionally, international funds can be used sparingly for long-term goals such as children's education abroad, and excessive investment in funds focused on a single sector or theme (such as only banking or IT) should be avoided.
When the market declines, many investors panic and stop their SIPs or withdraw their money. In reality, a market downturn brings the biggest opportunity for SIP investors, known as Rupee-Cost Averaging.
When you invest a fixed amount every month, the mutual fund units (NAV) become cheaper when the market falls, allowing you to acquire more units for the same amount. When the market rises again, those same units earn rapid profits, which automatically reduces the average purchase cost of your investment. Continuing SIP during a downturn is the key to building significant wealth in the long run.
Once an investment is started, it is not appropriate to ignore it. You should check your portfolio at least once a year. Your predetermined asset allocation may change due to market fluctuations. In such a situation, you should rebalance by transferring profits to safer assets to restore your original ratio.