How to Inculcate the Good Habit of Regular Mutual Fund Investments

If you want to build a financial corpus to secure your future and start creating wealth, investments in mutual funds can prove to be valuable. However, to be successful at investing in mutual funds, you need a personal financial plan and develop some "good habits".

Recently I received a call from Rashmi; she runs her own bakery business from home and was willing to invest in mutual funds. She said, "Mitali, I have been wondering for a while now to invest in mutual funds but I'm hesitant. So I thought it's better to connect with you and understand how mutual funds can work for me."

I replied, "Sure Rashmi, money saved is money earned. Mutual funds' investments can help you achieve your financial goals. Maintain good financial habits and you can become a successful investor."

Rashmi replied, "What are Financial Habits? I don't know about that... how do I get these financial habits?"

I responded, "For instance, uncertainties of COVID-19 pandemic had many individuals face financial difficulties. Most of them have learned a good financial habit that is to save a certain amount as emergency fund for crisis. Similarly, you need to follow some good financial habits to grow wealth with mutual funds investment. You don't become wealthy just by owning mutual funds, invest prudently and maintain good habits for wealth creation with mutual funds."

You see, investing through mutual funds can bring a about a significant change in your financial life. Mutual funds investment is the most convenient investment route for novice investors; it invests across various asset classes after assessing the risk-return suitability.

(Source: freepik.com )

To become a successful investor and achieve your envisioned financial goals through mutual funds investment, we have listed some of the good financial habits you must follow to build wealth:

1. Start investing as early as possible

Many of you often postpone your investment decisions to invest in mutual funds for several reasons: a) it is too complex; b) you need a huge amount to start investing; etc. So you simply put it off to another day. The impact of this procrastination delays you from achieving financial goals.

The earlier you start investing, the greater your potential and progress towards building wealth. If you start investing early, you have a long investment horizon and a better risk tolerance, especially when you are in the initial years of earning. Waiting for the "right time" leads to missing out on opportunities the market has to offer.

Start by investing small amounts regularly and then increase it gradually as your income rises. Investing early will inculcate the habit of apportioning a certain amount aside first when you receive your income and then planning your spending after.

Your investments will grow at a relatively faster pace when you begin young rather than when you invest at a later point in life. The earlier you invest, the better; you can gain higher returns on mutual funds investment. If you begin to invest in the best mutual funds at an early age, it gives your investments time to transform into a large corpus for your financial future.

2. Invest regularly

Investing regularly and effectively in the right investments allows more time for your investments to grow. By doing so you inculcate the habit of being responsible towards your finances and invest to secure your financial future. Investing regularly over a long period benefits from the compounding.

Investing in mutual funds regularly is a way to gain from the power of compounding and achieve financial goals. It encourages the habit of investing small amounts regularly in mutual funds by way of Systematic Investment Plan (SIPs). Investing through a SIP in mutual funds is suitable for any wallet size.

The money that we invest regularly every month via SIPs manifests on itself and grows. Therefore, to gain the most from the power of compounding, start investing early in SIPs. The earlier you plan to invest the longer you remain invested, the more compound interest you will be able to earn.

Investing through SIPs in top mutual funds helps. With SIPs, you maintain the financial habit of saving and investing a definite amount periodically, freed from the stress of timing the market.

3. Align your investments with financial goals

Many of you aim to achieve certain goals in life such as buying a dream house, a luxury car, wedding, and children's education, or having the retirement you want, etc. To achieve these goals you need to create an investment plan with a goal-based approach. Such investment planning will help you align your investments in mutual funds with your long term or short-term goals.

You must exercise a goal-setting process that entails listing all your financial goals. Investing in mutual funds must be done based on your suitability towards risk, the tenure of your investment/s, and your investment goals. These attributes help you filter out the funds that suit your financial objectives. Knowing which fund is right for you according to your financial goals is essential to making confident investment decisions to grow your wealth in a sustained manner.

Don't invest for your short-term needs in a long-term mutual fund, allocate your investments in effective schemes with dedicated investment horizons. This habit of align your mutual funds' investments with financial goals provides the flexibility to adjust and prioritise financial goals factoring fluctuations in life's circumstances and the market conditions.

4. Diversification

Diversification is the key to successful investing; you must diversify your investments across sectors and market capitalization while investing in mutual funds. You can gain diversification by spreading your investment among several different mutual funds that invest in different types of assets.

Equity mutual funds consist of several sub-categories across market capitalization, sectors, and themes. You may consider investing in various categories such as large-cap, mid-cap, small-cap, multi-cap, sectoral funds, thematic funds, etc. depending on your suitability. This reduces your exposure to market risk that you would face otherwise if you were dependent on a single asset class.

This habit will help you build a robust investment portfolio that can weather any storm, as no two asset classes perform and move in same direction, diversification helps benefit from market opportunities across asset classes.

5. Stay invested for long term

The important mantra to learn here is 'money grows if you give it time'. Patience is the key when it comes to any investments in mutual funds. If you are patient with your investments, you will generate stable and good returns. Mutual funds investment enables you to build wealth over a period of time.

Investing in equity mutual funds is a good option to invest in as it gives better returns over a long term. You may not panic during market volatility and follow the herd mentality, analyse your investments on qualitative and quantitative parameters and then make a worthy investment decision. For example, many investors panicked when the markets crashed in March 2020 and opted to exit. As a result, many missed the earning opportunity when the equity markets bounced back sharply and scaled to all-time highs by the end of 2020.

This habit assists you to stay financially disciplined and focused on the long-term approach, while making allocations in order to get the best outcomes from your mutual funds investment.

6. Empower yourself with financial literacy

Financial knowledge plays an important role in mutual funds investment. As an investor you must be financial aware before making an investment decision. Nowadays there are many sources from where you get market information and financial guidance; some also practise DIY investing. This is inclusive of investing online in mutual funds and with robo-advisers.

The online mutual funds' investments are popular among millennials, i.e. the tech-savvy generation. However, even if you have easily available resources to begin to mutual funds investment online on your fingertips, financial literacy is an essential part of it.

Financial literacy equips one with the important financial knowledge required to make effective investment decisions. Your financial literacy influences your decisions about mutual funds' investments. Lacking financial literacy may result in making unworthy investment decisions that could affect the well-being of your financial future.

To attain financial literacy, you must maintain a habit to enhance your financial literacy and stay financially aware while making your mutual funds' investments.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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Frequently Asked Questions (FAQs)

When should I start investing in Mutual Funds?

You should start investing in mutual funds is as early as possible. No need to time the market and wait for the "right time" it leads to missing out on opportunities the market has to offer. Mutual funds tend to grow their returns over a period, hence the earlier you start investing, the more possibility of healthier returns.

Do mutual funds investment require huge amount?

No, you can simply start mutual fund investments with smaller amounts. Consider investing through SIPs in mutual funds, it allows to start investments as low as Rs 500 per month. This will inculcate the habit of investing regularly in mutual funds and build substantial wealth in long term.

How should I select a worthy mutual fund scheme?

Select a worthy mutual fund scheme based on your risk appetite, investment horizon required to achieve your envisioned financial goals and your financial goals must align to the fund's investment objectives.

Can I buy mutual funds online?

Yes, you may consider investing in mutual funds online through several investing apps or portals available. However, ensure the safety of your sensitive financial data while investing online in mutual funds. [Read: How to Start Investing Through Online Platform: Guide for Beginners]

How frequently should I invest in mutual funds?

Mutual funds investment enables you to build wealth over a period of time. Investing in mutual funds regularly is a way to gain from the power of compounding and achieve your financial goals.

Happy Investing!

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