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Saving in Mutual Funds: Retire Rich

Mutual fund is pooled money that is invested in assets. A mutual fund company is a company that is regulated according to certain rules and regulations. It has a wide pool comprising of different assets that keep selling and redeeming its shares.

A lot has been said about the power of compounding and retiring rich. Mutual funds provide a better window for growth of your savings. It is not the power of compounded bank interest but the power of profits and dividends in this case.

We all know the potential of the stock market. It has the capacity to give enormous returns. However, the inverse is also true. More often than not, people try to dabble in stocks without proper understanding of market behavior and end up losing money. A portfolio manager of a mutual fund company is a past master in investment strategies and has the capacity to make your money work better for you.

If you do not have the capacity to make risky investments you can opt for a debt fund. There are money market instruments other than bank deposits that provide better returns and are equally, if not more, safe. These include government securities and debt obligations of municipal corporations and top rung corporate houses. Debt funds focus on income and will send you regular payouts. If you have a long investment horizon you can leave the payout with the mutual fund and they will reinvest it in the same fund or any other scheme of your choice.

If you have a longer horizon that is if you are looking at retiring rich you can choose an equity mutual fund that has an impeccable track record. Opt for a systematic investment plan (SIP) under the growth option.  Determine an amount that you can safely save every month and give standing instructions for half that amount. The fund will automatically draw the specified amount from your bank account and keep adding it to your investment.  This is a good way of averaging the cost of acquisition because no matter which way the markets are going you are buying into the mutual fund every month.

Investment decisions should not be taken in haste. Do your own research and prepare a shortlist of the top four or five mutual funds. Top mutual funds are those that have a good track record and have been constantly making good profits for their investors. When you get down to it you will find that that there are some names that will keep cropping up because the space at the top is pretty limited.

Whatever your risk appetite it is always good to keep your eggs in different baskets. After having taken a SIP option as above you should look for sector funds. For this strategy you will have to keep updating yourself regarding market trends, an activity that will not take too much of your time. Select fund/s in the sector you think has the potential for growth. Keep switching between sector funds when you see the growth potential has been tapped.

Depending upon your savings, the best strategy for retiring rich is to invest in a debt fund, SIP option of one of the top funds and sectoral funds that you keep on switching.