Mutual Fund Mantras to Help You Create Wealth

Written on Tuesday, September 8, 2015
By Sanjeev Puri

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The key to creating wealth and achieving life goals through mutual funds depends on how well you make use of these investing principles. Mutual funds: To make life easy Mutual funds are one of the most investor-friendly investments available amongst all the market-linked investments. There are mutual fund schemes for every asset class, be it equity, debt, a mix of them or asset, such as, gold. This makes mutual fund suitable for meeting different goals, at different life stages of an investor.

More and more investors are jumping on to the bandwagon of mutual fund in order to reach their goals in life. Strong retail participation is clearly visible among Indian investors. The increase in the number of folios could be a result of new investor base or it could be due to the return of investors who had left the market after the downturn of 2008. No matter what kind of investor one is, if one follows certain mantras and the principles of mutual fund investing, the chance of a bad experience is minimized and instead, one is able to reap the benefits of mutual fund in meeting his goals. Let's discuss some mantras of mutual fund investing.

1. Match your goals to schemes
Why would you need to invest in mutual fund? Answer this question for yourself. The choice of the mutual fund scheme would depend on your answer. Not all schemes will help you meet your goals. You will need to link your goal with the investment horizon and then, choose the right mutual fund scheme to achieve your desired goals. No matter, how markets move, intermittently before your goal is achieved, stay invested. Review schemes performance after every two years to remove under-performing funds, but your funds should be a part of equity markets.

2. Investment style
Not all large-caps or mid-cap funds may have the same investment style. The fund manager could be aggressive in choosing growth stocks out of the pack or could go along the value stocks, which could outperform after certain period. Certain funds could be a mix of both growth and value style and thus, are termed as blend. Understanding this and adding MFs to your portfolio helps in diversifying risks too.

3. Never ignore the objective of the scheme
Investing in a specific mutual fund scheme, without knowing the scheme's objective, is like boarding a train without any destination in mind. Every fund's information document, including the fact sheet carries the objective of the scheme. Read it to align with your goals. Depending on the objective of the mutual fund scheme the fund manager invests in the stocks of large-, mid-or small cap companies, or in a mix of them.

4. Building wealth, little by little
One big mantra of Mutual fund investing is a systematic investment plan (SIP). It's been proved by several studies in the past that returns from SIP investing far exceeds the returns through lump sum investing. This is because in SIP, the average cost of holding units is less and also because funds participate in equity assets at all levels. The risk of timing the market is well-taken care by SIP approach. SIP involves investing a fixed amount of money at regular intervals, instead of investing a lump sum at one go.

5. Index funds are for beginners
As a beginner to investments, start off with index funds as they are least volatile equity funds. An index fund is a diversified equity fund, with a difference—a fund manager has absolutely no say in stock selection. At all times, the portfolio of an index fund mirrors an index, both in its choice of stocks and their percentage holding. Because of this correlation, the NAV of an index fund moves virtually in line with the index it tracks.

6. Diversified funds- Must for portfolio
Once accustomed to the world of mutual fund, one should then move on from index funds to the more actively managed ones, which have the potential to beat the market and benchmark by a decent margin. Add diversified mutual fund schemes to your portfolio which are essentially large-cap in nature. Typically, a large-cap mutual fund invests in the shares of the companies that have a higher market capitalization and are well-diversified, investing mainly in the top 30, 50, 100 or 200 stocks on an exchange.

7. Boosting your portfolio
Add mid-cap funds to your portfolio for a kicker of returns. Mid- and small-cap funds are riskier than large-caps as they invest in relatively smaller companies, which are in the growth stage and generally under researched. Once these companies grow in size, they are recognized by the market and enjoy better valuations. Before you decide to invest in a mid-cap fund, remember that it cannot form the foundation of your portfolio. It should be included only to the extent permitted by your risk profile, in order to enhance the returns.

8. Save taxes through mutual funds
Mutual funds can help you reduce tax burden too. Investing in Equity Linked Savings Schemes, popularly known as ELSS, up to a maximum of Rs 1.5 lakh in a year, with a lock-in period of 3 years, gets a deduction from the income under section 80 C of the Income Tax Act. In addition to reaping long-term equity benefits from MF and ELSS, thus, reduces tax liability. Once the lock-in is over, one may continue even if the markets are down and reap benefit over the long term.

9. Never consider fund's performance in isolation
Whether it's the index fund or diversified large-cap or the midcap scheme, picking the right fund is important. Look at the fund's performance over the long-term because consistency is the key to creating wealth. The performance of schemes within the same fund family may vary because, they are managed by individual fund managers and their portfolio composition will also be different, in line with the fund manager's strategy to manage your money. Therefore, take a close look at the targeted scheme's performance, its portfolio and the investment strategy that the scheme follows. Compare the scheme's performance to its benchmark and the market. Never consider performance in isolation.

10. Stick to growth option
If you are not banking on returns for regular income, opt for a growth plan, which enables your investment to accumulate. In a growth plan, the gains made by your scheme remain with it, and are then reinvested. The appreciation in value gets reflected in the form of a rising NAV. If you are looking for regular income from funds, opt for a Systematic Withdrawal Plan (SWP) over dividend option. This is precisely because dividend received is after deduction of dividend distribution tax. Under SWP of the growth option, units get redeemed at regular intervals, thus, providing regular income to unit-holders and are tax efficient.

11. Stagger investments into markets
At times, if you are reluctant to put a lump sum amount into equity market, but need to keep putting intermittently, use the Systematic Transfer Plan (STP) feature of mutual funds. Through STP, you don't expose all your money into equities at one go, but transfer parts of a lump sum from one mutual fund scheme to another, within the same fund house, at regular intervals. Such a transfer averages the cost of purchase, mitigating market-related risks. Typically, an investor first parks his funds in a liquid or a floating rate debt fund, and then transfers them via STP to the scheme (usually an equity or balanced) of his choice at regular intervals.

12. Keep tracking your portfolio
Tracking your investments is as important as choosing the right scheme. Monitoring the performance of your funds, at least once every two years, will help you understand how your money is being managed. Detect undesirable changes and signs of under-performance in your scheme, and initiate corrective action before things get worse. See if the scheme's performance is in line with its initial objectives and whether it is performing well against its own benchmark. Consistent under-performers in one's portfolio may be replaced with front-runners after proper deliberations.

13. Avoid duplication of schemes
Investing in mutual fund schemes without understanding its allocation-whether large-, mid- or small-cap, or in equity or debt- leads to duplication. You might buy various diversified funds, but their composition across sectors and stocks may be the same. This would go against the principle of diversification as the risk gets concentrated in specific sectors only. However, do not diversify for the sake of diversification.

14. De-risk portfolio as your goal approaches
Follow the life-stage approach to investing while saving through mutual funds. As you reach your goal, re-balance the allocation towards assets, such as, equity and debt. When around 10 years away from retirement, your priority should be to ensure the safety of your accumulated wealth. Plan out the de-risking strategy and wait for an opportune time to move your money from volatile equity to safer debt. By the time you are 1-2 years away from retirement, you must move a large portion of your accumulated wealth from equity into debt funds.


Rather than constantly looking at the stock market index and planning your next move as per its movement, it's better if you identify your goals. Create an investment plan for each of the goals and start investing through SIP. Follow the mantras of mutual fund investing and have a safe landing in reaching your life's goals with minimum fuss. 



#Mutual Fund investments are subject to market risk, read scheme related document carefully before investing. 

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