How To Invest Extra Money In Mutual Funds
A common question when you have surplus investible funds is whether to buy a new fund or increase your current exposure. A widespread notion is that when you have more money, it is best to add new funds to your portfolio. However, is this actually necessary?
What factors should you consider before making a new investment?
Here are four factors you must consider while making your investment decision.
1. Well performing
If your chosen mutual funds are performing well, you may consider increasing the investment amount if you have surplus funds. Adding new funds when your existing ones are doing well only makes it difficult to manage your portfolio.
2. Asset allocation
When you invest in different funds, you aim to achieve a certain mix of allocation among your debt and equity holdings. At the time of investing additional funds in existing schemes, you need to ensure the asset allocation does not change. In case there is a huge modification to the allocation, you may consider investing in new mutual funds.
3. Portfolio diversification
One of the important objectives, when you invest in mutual funds, is portfolio diversification. If you have surplus funds, you may consider investing these in new funds only if you are able to find schemes that do not overlap your existing holdings. For example, if you hold a large-cap fund, you may consider investing in a blue chip scheme that may not be included in your portfolio. According to experts, including new funds is advisable only to diversify across different strategies that may be lacking in your current portfolio.
4. Rebalance your holdings
Investing additional funds should be done with the objective of rebalancing your current holdings. This is especially recommended if your debt to equity ratio changes significantly. For example, assume that your portfolio comprised debt: equity in the ratio of 40:60. However, if your equity holdings suddenly increase to 80%, you may consider investing in new debt mutual funds to rebalance your holdings.
Often, when you have surplus funds, you want to invest these in top-performing funds. However, a top performer today may be replaced by another fund tomorrow. Therefore, experts recommend holding multiple funds to diversify your portfolio. However, including new funds to make fresh investments is not advisable if you are able to achieve diversification through your current holdings.
It may not always be wise to invest additional money in existing funds. Here are two instances when you may buy mutual funds that are not already included in your portfolio.
A. Investing for new financial goals
Your financial goals change during your lifetime. Goal-based investing is the best strategy to maximize your benefits. Therefore, if you are investing in mutual funds because of a new goal, you may choose to buy a new scheme. It is advisable to create a new investment that suits your fresh financial goal. However, when you choose to include new funds in your portfolio; you need to ensure you do not miss out on any good opportunities that are available with your current holdings.
B. Significant investible surplus
In case you are increasing your investment amount for an existing goal, the quantum plays an important role. In case you want to increase the investment amount by a large amount, you need to consider the following two factors.
Were you previously unable to diversify because the investment amount was small?
Are there any funds that are under-performing and if there are any new schemes that may be included using the fresh amount?
You may start with a small amount early in your career, which limited you from investing in mutual funds across different schemes. When you have additional amount to invest, you may achieve the portfolio diversification and balance based on the investment horizon and risk appetite. If you have missed on investing in certain types of funds, now may be the right time to include these with the additional amount.
When you want to buy mutual funds, the hundreds of schemes offered by multiple asset management companies (AMCs) will surprise you. Making the right choice among the wide options available is not easy.
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