Money has typically been a very personal thing, and most of the people are not comfortable sharing their financial details with others. As such, they tend to manage their investments on their own. This brings them the following inherent benefits of investing and managing funds on their own:
Staying closely involved in the financial planning process
Staying informed about the portfolio composition in a better manner
Knowing the risks associated with different investments and choosing the portfolio accordingly
While the investors were not aware of ‘what is investment management,’ the household surplus funds had been flowing into traditional investment products owing to the risk-averse nature. However, off late, mutual funds have been emerging as the preferred investment choice for investing the funds. With the inflow of Rs. 8,183 crores into mutual funds through Systematic Investment Plans (SIPs) during May 2019 (Source: AMFI), the retail investors are staying inclined towards regular investing.
Mutual Funds(MFs) enable you to take control of your investments since you are choosing the mutual fund schemes on your own. However, with the benefit of professional fund management, you can be certain that the experts are taking the investment decisions after due research and analysis. Further, you get the benefit of Mutual Funds (MFs) investment management, irrespective of your investment amount, as the mutual funds pool your investments with other investors’ money and create a more substantial portfolio.
However, as an investor, you are also expected to stay disciplined and responsible to mitigate risk and maximise returns, while choosing the mutual fund schemes. Here are five key investment management strategies which you should follow:
Building a diversified portfolio of mutual fund schemes spread across asset classes helps you to mitigate your investment risk. The asset allocation, as well as selection of the mutual fund scheme, must be made based on your financial goals, investment horizon, and risk appetite. For example, if you cannot withstand market volatilities, your portfolio could be less of equity and more of debt. On the other hand, if you are an investor investing for the long term and not significantly get impacted by short term volatility, equity allocation could be higher.
Consistent Investing through SIPs
SIP allows you to make regular investments into mutual fund scheme of your choice for a specified amount and frequency as opted by you. As such, it inculcates a sense of financial discipline into your lives, since you continue to make investments irrespective of whether the markets are up or down. This helps you average your cost of investments over time and also eliminates the need for timing the market for making investments.
Investing in Direct Plans
When you are making investments into mutual funds directly without any broker, it makes sense to choose the Direct plans for investment. Such plans come with a lower expense structure, as they pass on the benefit of distributors’ brokerage and commission to your investments. The difference in the expense ratio of the direct plans and regular plans helps you garner better returns, which provides exponential returns over the long term through the power of compounding.
Rebalancing of the Portfolio
You must rebalance your portfolio on a periodical basis, to align it with your changing financial goals, investment preferences, and risk appetite. Risk profile generally skews to be conservative, as one grows in age. Further, your initial portfolio allocation into debt and equity may also have changed due to the relative performance of different mutual fund schemes. As such, it makes sense to rebalance the portfolio to maintain your optimal asset allocation by booking profits for the schemes that have outperformed and increasing allocation where the valuations are relatively better.
Periodic Review of the Portfolio
You should undertake a periodic review of your portfolio to determine the underperforming schemes and to analyse if the portfolio performance keeps you on track to timely achieve your financial goals. One can also consider underperforming schemes with better performing schemes, but in doing such performance review, long term returns of the scheme must be considered instead of getting biased with short-term performance.
With the above five investment strategies, the investors can take charge of their finances and steer through the journey of investing for long term wealth creation.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.