A Complete Guide On How Mutual Funds Work? | UTI Mutual Funds

After entering the job market, young professionals generally have one common goal. The specific goal is to accumulate enough wealth that could be helpful for their day-to-day expenditures after retirement. Retirement is a very important decision because, by opting to retire, you decide to bid farewell to not just your career but also the regular inflow of monthly income from full-time employment. In case you haven’t acquired enough savings, you can choose to delay your retirement. One of the ways, you can acquire wealth is by formulating a financial plan.

One of the common ways to accumulate enough wealth for a retirement corpus is to invest. You can either opt to invest in a conservative investment scheme such as an FD i.e., a fixed deposit offered by a bank, or opt to invest in the market. However, if you are serious about creating a healthy retirement corpus, it is recommended that you allocate a portion of monthly earnings to the market. To carry out investments in the market, you need to select one of the investment tools or schemes. The preferred scheme of most investment plans in mutual funds.

What are mutual funds?

One of the preferred market investment schemes, mutual funds are the schemes in which an investor’s money is pooled with the money of other like-minded investors. Once enough money is collected in the fund, it is used to invest in financial securities such as gold, money market instruments, bonds, and stocks. The mutual fund portfolio is managed by a professional referred to as the fund manager. The main goal of the said manager is to provide you with optimum returns on your investment. Later, the income generated is divided proportionately among the investors.

However, just allocating a part of your monthly income to mutual funds is not enough. There are certain tips that you need to apply to your investments if you are serious about accumulating wealth. Listed below are some of them:

  1. Choose the right type of mutual fund scheme:

The first and foremost thing you need to create a strong retirement corpus is to select one amongst the many types of mutual funds that are available in the market as an investment option. Each of these schemes is known for coming with its level of risks. All you need to do is figure out your risk appetite and then select the variant of the mutual fund scheme. For instance, in case you are not prepared to take investment risks, then it will be prudent to choose a fund that directs its investments to debt.

  1. Choose SIPs over lump-sum investments:

A common misconception people have about investing is that fund allocation is possible only if it is done through a one-time lump-sum investment. However, that’s not the case. Allocating funds with the help of a systematic investment plan, i.e., SIP is recommended for those investing in equity for the first time. That’s because a lump sum investment can expose you to the risk of catching a stock market peak. Conversely, SIP allows you to spread your investments across different market levels. SIPs also come with the benefit of rupee cost averaging, which helps you in averaging out the cost of your investment and earn higher returns over time.

  1. Please keep your portfolio diversified:

Diversification is the process in which your funds are spread across different asset classes. Doing so may help you in earning risk-adjusted returns. Meaning, that in case one mutual fund underperforms, the other funds make up for the loss caused by the underperforming asset class.

  1. Make sure that the KYC documents are updated:

The know your customer (KYC) is a government regulation. One cannot invest in a mutual fund scheme if it is found that they have not completed the KYC process. The procedure is regulated for most financial transactions in India. It is done to determine the source of funds and thereby prevent offenses like money laundering. For being KYC-compliant, all one needs is a PAN card and valid address proof.

Mutual funds are known for coming with the potential of generating respectable returns. However, simultaneously, you should also be aware of the risk associated with these schemes before investing. And, by following the tips mentioned above, you may succeed in overcoming the investment risks.