Equity related mutual funds allow to invest in more than 20+ stocks in one mutual funds. A mutual fund is diversified by itself. Typically they hold about 20+ stocks, some funds hold even upto 50 stocks. Hence, too many funds in your portfolio is a bad idea. To become rich, invest maximum 6-8 funds for better management and returns. Each funds should not have more than 30% overlapping stocks. For instances, selecting all 6 funds as large cap would invest in same set of stocks. It would have 70% overlap and would invest on same stocks. So risk would be higher in case of change in large cap segments. So diversify your funds by selecting large cap, small cap and sector funds.
Too many funds in your portfolio is a bad idea
Half a dozen, that is, about 6 funds are good enough. And yes, you should remember the names of your funds. It also means that you should have a minimum of 15% allocation to any fund that you invest in. This allows any fund to make a difference to your portfolio. Invest in SIP by investing monthly in each mutual funds. Increase your mutual funds contribution by 10% every year. It is important to build long term investment.
Increase your mutual funds contribution by 10% every year.
20 steps to build wealth in mutual funds:
- List your financial goals and time horizon of each goal
- Save first and then spend
- Save at least your 40% income
- Start investing early, like as early as you can
- Buy health insurance for yourself (a personal cover, even if provided by a corporate)
- Buy term plan (specially if you have financial dependents)
- Build an emergency fund – 6 to 12 months of your regular expenses
- Do your tax planning; However, don’t invest just for saving tax
- Invest in equity for long term – this is the only way to build real wealth in long term.
- Learn how equity works as also what is a stock or a mutual fund.
- Stock trading requires time and effort. Explore stock market if you have time enough time to explore.
- Take a regular (6 monthly, or yearly) stock of all your investments. This includes EPF, PPF, FDs, Stocks, MFs, etc.
- Understand how compounding works with investing and several other life habits. This will help you align your actions specially of investing regularly.
- Have 1 or max 2 credit cards and if you find yourself spending more because of them, shut them down.
- Pay your credit cards first and in time, don’t roll over credit, don’t incur interest or late fee charges
- Don’t borrow or take loans for items that depreciate in value (car, phones, etc). It would reduce your investment contribution.
- Don’t let buying a house become a noose around your neck. Invest for it, build the funds and then buy, ideally with 60% down.
- Have a financial planner right in the beginning to build good financial habits and to prevent your from making BIG mistakes.
- Increase your investment by 10% every year. Increase your SIP mutual fund contribution by 10 -20% every year to build wealth.
- Keep it simple with 6 mutual funds and each funds with 15% of your investment.
Starting mutual funds in first step in financial planning. But increasing the contribution is important in building wealth. Start your SIP and increase it by every year. Happy Investing.