Mutual Fund Investment: How to Become a Millionaire with Small Investments A Complete Guide
In the current world of finance, it is not possible to just save money in a bank account or use Fixed Deposits. The interest rates do not always manage to outperform inflation and this implies that your money is gradually losing its buying power. Rather than letting your money lie on the ground, it is only prudent to invest your money and have it grow. Mutual funds are one of the most convenient and efficient means to do so.
This free e-book describes what mutual funds are, their various types, benefits and risks, and why even small investments can make you a long term wealth-builder.
Mutual Funds types.
A mutual fund is an investment whereby money is gathered by more than one investor and is under the management of a professional fund manager. This pooled money is invested into any financial instrument like stocks, bonds, government securities or even gold.
Profits (or losses) made out of these investments are allocated to investors depending on the amount invested. Mutual funds provide an easy and professionally managed option to novices who may not have the time or information to invest directly in the stock market.
Mutual Funds types.
The primary way of classifying the mutual funds is through the location of the invested money. The three most common types are:
1. Equity Funds
The stocks of companies are mainly invested in the equity mutual funds. These are riskier funds but have the possibility of greater returns, particularly in the long-term. They suit well investors who can afford the risk of enhanced growth.
2. Debt Funds
Debt funds invest in fixed-income securities like government bonds, treasury bills and corporate debt securities. They are rather safe investments than equity funds and can be used by investors who want to get stable and predictable returns.
3. Hybrid Funds
Hybrid funds are investments that are made in a combination of equity and debt. They would like to strike a balance between risk and return and this would make them a good option among moderate investors who desire to have growth and risk-taking at the same time.
When investing in mutual funds, you can choose between two things:
SIP enables you to make investment on a set sum on a regular basis (monthly or weekly). For example, you can start investing with as little as ₹500 per month. SIP is best suited to those on a salary and aids in accumulating wealth over time with the force of compounding and rupee cost averaging.
You spend a lot of money all at once in this technique. It is applicable to people who have excess cash at their disposal. Nevertheless, timing the market is essential in this strategy.
Professional Management
Your funds are managed by seasoned fund managers who examine markets and make wise decisions on your behalf.
Diversification
Mutual funds diversify your investment in various assets and hence the risk of loss is minimized as compared to investing on a particular stock.
Low Investment Requirement
The amount that you can invest is small and the mutual funds are accessible to all including the beginners.
Transparency
Mutual fund performance, Portfolio and Net Asset Value (NAV) are updated and can be easily accessed online.
Liquidity
The ability to withdraw your money whenever you want gives you an opportunity to spend your money when you need it most and this is seen in most mutual funds.
Although mutual funds have a number of benefits, they have some risks:
Market Risk
Investment value is liable to change according to market conditions particularly in equity funds.
Exit Load
Other mutual funds will also impose a fee in case you withdraw your investment before a certain time.
Expense Ratio
This is how the fund house will charge to manage your investment. Reduced expense ratios are typically more favorable to long-term investors.
1. State Your Financial Objectives.
You must always begin with a goal in mind, be it purchasing a home, educating your child or retiring.
2. Invest for the Long Term
Mutual funds are best invested over a period of 5-10 years. Long-term investment will minimize the effects of market volatility.
3. Choose Direct Plans
You save commissions by investing directly without intermediaries and are more likely to boost your overall returns.
4. Remain Composed when the markets are volatile.
Panic not when markets decline. Rather, consider it as a chance to invest more at a low price.
5. Do Proper Research
Examine past performance of the fund, experience of fund manager and fund expense ratio before investing.
Mutual funds are not reserved to the rich people, but to everyone who wants to invest his/her money in a wise way. Even a little and regular investment can become a huge sum of money with time, due to the power of compounding.
Financial independence could be attained by starting young, being disciplined and making regular investments. Keep in mind that such a little investment now can be a robust economic base in the future.
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