10 Tips to Build Wealth with Mutual Funds
Building wealth is crucial for a secure future. It entails ensuring financial stability for yourself and your family. However, building wealth isn't something that happens overnight. It requires strategic planning and disciplined action. With consistent efforts and smart investment decisions, it’s possible to build wealth, ensure financial stability, and achieve financial independence. Mutual funds emerge as valuable tools for navigating this journey, offering access to a diversified portfolio and professional management. In this blog, we will analyse some tips to build wealth with mutual funds.
How to Build Wealth with Mutual Funds?
Building wealth is not a quick journey; it needs a lot of time, patience, consistency, and prudent decisions. Let's look at some steps and strategies to accelerate your wealth-building journey.
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Start investing early
Building wealth isn't based on 'get rich quick' schemes. Neither is wealth built on luck. Instead, it is a slow and steady process that can reward you immensely in the long term. By starting early, even if it's small, you can leverage the magic of compounding in your investment. Let's look at this with an example.
Example: If you started an SIP of Rs 20,000 15 years ago, you could've built an estimated corpus of Rs 1 crore* as of today. However, if you had started an SIP of just Rs 10,000 30 years ago, you could've built an estimated corpus of Rs 3.50 crore* as of today.
Hence, you can start small if the investment horizon is long-term.
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Be consistent
Consistency plays a pivotal role in building wealth. With Systematic Investment Plans (SIPs), investors can embrace consistency. Through SIPs, investors can invest a fixed amount in a mutual fund at regular intervals. Over time, compounding transforms these periodic contributions into substantial wealth. Hence, similar to how gardeners nurture their plants, investors can grow their wealth through regular contributions.
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Diversify Strategically
Diversification is a key element in wealth building. It plays a crucial role in investment success by mitigating risk. Diversification refers to the process of spreading your investments across different asset classes to reduce risk, eventually leading to enhanced returns. By spreading investments across various mutual fund types like equity, debt, and hybrid funds, investors can minimise the impact of underperformance in any single fund.
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Asset allocation
Asset allocation refers to how one should diversify their investments across different asset classes. A well-crafted asset allocation strategy considers your risk tolerance, investment horizon, and financial objectives. It is a strategic approach to investing that can help you build wealth over time by optimising the balance between risk and reward.
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Increase Investment (Through SIP Top-up/lump sum)
Once you start an SIP, you should opt to top-up your investments at regular intervals. This helps to keep your SIP contributions in line with inflation. This can also help you build wealth at an accelerated pace and fulfil financial needs faster as compared to SIPs. Let’s look at this with the example of two friends, Ram and Shyam.
Example: Shyam started an SIP of Rs. 10,000 in equity mutual funds 25 years ago, which helped him build an estimated corpus of Rs. 1.88 crore* as of today. On the other hand, Ram started an SIP of Rs. 10,000 in equity mutual funds 25 years ago and opted for an annual top-up of Rs. 1,000 through which he built an estimated corpus of Rs. 3.12 crore* as of today, a massive difference of Rs 1.24 crore!
Moreover, when you receive a raise or bonus, or you have a surplus, you should consider investing it to gain returns on that, too. This innovative strategy can help you build wealth at a quicker pace.
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Regular portfolio reviews
The investment procedure doesn’t end right after you make a transaction. After investing, it is important that you track your portfolio to ensure that your wealth-building journey is on the right path. This would also allow you to amend changes in your portfolio in case of any deviations. Regularly reviewing and adjusting your portfolio to align it with your changing circumstances can increase your chances of building wealth and ensuring a solid foundation for your future.
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Avoid emotional biases
Sometimes, investors fall prey to their emotional biases and make irrational investment decisions. Detaching from emotional biases is crucial for making rational decisions. Emotions like fear and greed can often cloud judgment and lead to impulsive decisions, eventually leading to losses and missed opportunities. To make effective financial decisions, it is essential to approach the market rationally, focusing on long-term investment objectives and staying invested.
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Be Patient
Patience is one of the most important traits required to build wealth in the long term. Building wealth for your future is inherently a long journey. Hence, it requires discipline and a steadfast focus on your investment strategy, especially during market volatility. Given the volatile nature of the market, it is important not to get swayed by market movements and stay committed to the objective of building wealth. Patience and a long-term perspective are the keys to success.
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Spend wisely
In today's ever-evolving world, everyone seeks instant gratification. Hence, it makes resisting the temptation to spend hard-earned money and investment gains very difficult. However, when you spend your gains and hard-earned money on short-lasting moments of pleasure, you lose sight of your primary target, i.e. building wealth. When the investment aim is to accumulate wealth, you should budget wisely, be prudent with expenses, and focus on what you need rather than what you want.
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Get Guidance from a Mutual Fund Distributor
Seeking guidance from a certified mutual fund distributor (MFD) can be a valuable step in your investment journey. MFDs are certified and skilled individuals in the field of mutual funds who can provide personalised guidance and support based on your unique financial objectives and risk tolerance. They can help you understand complex investment concepts, assess your financial situation, and develop a tailored investment strategy. Moreover, distributors conduct regular reviews of your portfolio and can hand-hold you throughout your investment journey. This can help you avoid emotional biases and be patient, also helping you stay on track to build wealth. By leveraging their guidance, you can make informed decisions about your investments and increase your chances of achieving long-term investment success.
Conclusion:
Building wealth is a journey that demands unwavering consistency, disciplined effort, and steadfast patience. It's similar to nurturing a tree, requiring meticulous care and a clear strategy. The rewards reflect the establishment of a stable financial future and wealth accumulation. Embracing the tips mentioned above empowers individuals to pursue their aspirations, freeing them from financial constraints and creating opportunities, breaking the cycle of financial insecurity, and laying the foundation for prosperity. Opting for the guidance of a mutual fund distributor can help you invest according to the tips mentioned above. If you want the guidance of a dedicated mutual fund distributor, open an account today with NJ Wealth, one of India’s largest mutual fund distributor!
(*Assuming investment in Equity equity fund and an average return of 12.64% p.a. as per AMFI Best Practices Guidelines Circular No. 135/BP/109/2023-24 dated November 01, 2023. Past performance may or may not be sustained in the future.)