As the COVID-19 pandemic started spreading across the earth, people across the world were forced to look at new avenues for earning income as they were confined to the four walls of the home. Once work from home became a norm, working professionals both new and veterans started to realize that if they wanted to live a comfortable life after quitting the job market altogether, they need to look at avenues other than full-time employment for post-retirement income. That’s where the concept of financial planning steps in. This procedure requires you to ascertain how much of your income is to be allocated to an investment plan. Once you have determined fund allocation, you are required to choose the investment option that can help you in achieving your financial goals. One of the many investment options that are available in India is mutual funds.
What are mutual funds?
Mutual funds are an investment tool that is known for collecting money from a group of investors with an eye on purchasing different securities. The money which is pooled can be used to invest in different financial securities like gold, stocks, and money market instruments. Once a unit is purchased in a mutual fund, the investor owns a small stake in all the investments which are a part of the fund. Because of the numerous advantages associated with mutual funds, they are considered a prudent choice for investments.
How do they work?
This is how a mutual fund scheme works. Firstly, you need to select a mutual fund scheme offered by an AMC i.e., an asset management company. Each variant of mutual funds has a specific investment objective catering to distinct investment needs. Depending on the fund’s objective, the money from the pooled fund is invested into various securities such as money market instruments, stocks, gold, and bonds. A professional called a fund manager is responsible for overseeing each fund. The fund manager has only one objective. It is to earn optimal returns on the fund’s investments. Then, the revenue generated by the fund is divided and distributed among the different investors proportionately.
However, one of the important aspects to remember about mutual funds is that mutual funds are not a monolith. There are numerous types of mutual funds that are available in the market as an option for investors. Listed below are some of the common types:
- Debt fund:
Debt funds also referred to as fixed-income funds, are known for investing in assets like corporate bonds and government securities. The main objective of a debt fund is to provide reasonable revenue to the investors. They are considered an ideal investment option if your financial goal is acquiring a steady income over time.
- Equity fund:
This type of mutual fund is known for investing the investors’ pooled money in stocks. Providing capital appreciation is one of the main objectives of this fund. But it is important to note the fact that the revenue from equity funds is connected to the market movements of stocks. Hence, as an investor, you need to brace yourself for taking a lot of risks. Equity funds are an ideal choice if you are investing for long term goals such as retirement.
- Hybrid funds:
Hybrid funds are a type of mutual fund that comes with both stock (equity) and bond (debt) components in a specific ratio. These funds are known for helping investors in diversifying their investment portfolios by allocating funds to asset classes such as debt and equities. Generally, this variant of mutual funds is known for sticking to a relatively fixed mix of bonds and stocks.
- Exchange-traded funds (ETFs):
ETFs are known for being a collection of different securities such as shares, money market instruments, bonds, etc. Simply put, an exchange-traded fund is a combination of different investment avenues. They are known for offering investors the best attributes of two popular financial assets, i.e., stocks and mutual funds.
What to do to acquire ₹5 crores in 20 years through mutual funds?
To acquire ₹5 crores through mutual funds, you need to follow the tips below:
- Don’t have many schemes in your portfolio:
In the name of achieving diversification, some investors make the mistake of including numerous schemes under the name of diversifying their investments. Numerous schemes, instead of diversifying will drain your portfolio. Hence, it is better to limit your investments to one or two schemes.
- Increase your investments after a salary hike:
Just investing a part of your income is not enough. Every time when your salary is hiked, it is important to increase your SIP investments instead of keeping the investments the same as before.
- Invest regularly even during a bear phase:
It is important for you to continue investing regardless of the market conditions. Remember, the market is cyclical. Bull runs are not permanent, and neither are bear phases. Therefore, while it might be tempting for you to redeem your fund when the market is not performing very well. However, as stated above, this bad phase is temporary and things in the market should be up and running soon. Therefore, by pushing through, your investments will keep on growing.
Following the three tips above should be helpful in acquiring ₹5 crores in twenty years with the help of mutual funds. Good luck.