A Mutual Fund is a collective investment vehicle. It is a pool of investors’ money invested according to pre-specified investment objectives. Mutual Funds have a range of schemes that cater to the varying needs and preferences of investors according to their risk-taking ability and investment goal.
How big the investment should grow will depend on the purpose (goal) it has to serve. If we can define our future needs, even approximately, we know how much we need to save and invest the savings to grow over time. We have to tune our investments to where we want to go, how long we have to get there, and how fast we therefore have to run. Investments need to be chosen carefully after understanding the risks involved. The return on our investments depends on the risk taken and the scheme chosen.
Many individuals believe that some people are extremely successful with their investments because they have found a magical formula to multiply their wealth. However, a magical formula or a big secret is never involved in successful investing.
Self-Study:
Before starting to invest, successful investors tend to conduct a Self-Study first. As Lawrence J. Peter rightly said, “If you don’t know where you are going, you will probably end up somewhere else.”
Making a good plan is like having a road map. A successful investor knows their ultimate goal and the best way to reach it. He always links his investments with a goal, like Retirement, Children’s Education, Holiday trips, etc., and always sticks to the goal irrespective of the market conditions.
Risk Appetite
A successful investor knows very well her risk appetite. Risk-taking ability differs with one’s own financial status, family background, income level, career prospects, health, age, experience with investments, etc. The difference between an amateur investor and a successful investor is that the former always chooses investments as per her risk appetite. A successful investor never goes for the highest potential return if the associated risk is beyond her capacity. In the end, an aggressive investor will more likely stick to her stand, whereas a conservative will find it very difficult to hold her nerve in adverse market circumstances – ultimately withdrawing investments at the wrong time and hurting her goals.
Long-term Perspective
The Legendary investor Warren Buffet used to say that he bought stocks on the assumption that they could close down the market the next day and not reopen it for the next five years. He also advised buying only something you would be perfectly happy to hold if the market shuts down for the next 10 years. This is from a man who is called the greatest investor of all time.
A successful investor never tries to time the market; he always puts his time in the market. Over the short term, stock markets are very volatile, and hence, there is a high probability that the current value will go below your invested amount. The NAV of the Equity Oriented Mutual Funds also moves with the market. Apart from market volatility, the NAV of the Debt Oriented Mutual Fund schemes also vary due to the RBI policies and economic conditions. So, investing with a long-term perspective, according to your goal and risk appetite, is one of the safest ways to succeed in the Mutual Fund Industry.
Diversification
A successful investor always possesses a strong and well-diversified portfolio. By diversifying across several sectors according to her goal and risk appetite, she assures the maximum benefit from her investment. When one sector does not perform well, other sectors may reap higher benefits. A successful mutual fund investor does not put all her investments in only Large Cap, Mid Cap, or Small Cap. Neither does she put all her money in a single AMC. She invests across the industry and schemes that perfectly suit her Investment Goals and Risk-taking ability.
We may compare the behavioral nature of a successful investor with that of a Squirrel. A squirrel is a Scatter Hoarder. While a Hoarder will hide food in one place –like an amateur investor investing all her investments in one single sector/AMC, a Scatter Hoarder hides food in many different places, like a successful investor diversifying his investments.
~Suman Dan
