Sparkle this Diwali by adding mutual funds to your portfolio

The festive cheer around Diwali may tempt you to splurge first and think later, but it may also be a suitable time to start some new investments. Being a festival of prosperity, Diwali may be a time to start investing in mutual funds that align with your financial objectives.

Table of contents

• Why mutual funds may be suitable this Diwali
• Types of mutual funds to consider
• How to choose a suitable mutual fund for your goals
• Tips to potentially maximise Diwali mutual fund investments
• Common pitfalls to avoid

Why mutual funds may be suitable this Diwali

Mutual funds offer diversification, professional management, and regulatory oversight with transparent pricing. When you invest in mutual funds, you get fractional access to hundreds of stocks or bonds, instead of concentrating risk in only a couple of names. And, you can start investing with just Rs. 500 generally and scale your investments scale as your income grows. If you’ve struggled to invest consistently, an SIP in a suitable scheme might add a financially responsible luster to this festive season.

Types of mutual funds to consider

Equity funds

Equity funds target long-term growth potential by investing in the stocks of various companies. Broad-market index funds (such as those benchmarked to the Nifty 50 or Nifty Next 50) or diversified categories like large and mid cap or flexi cap may be suitable for a core exposure. Mid cap or small cap funds may offer higher potential returns but also amplify drawdowns. Hence, their total weight in the portfolio may depend on your investment horizon and risk appetite. Passive index funds may be suitable for investors seeking relatively low-cost exposure to the broad market or a specific index.

Debt funds

Debt funds may make the portfolio relatively steady and provide liquidity. For emergency money or near-term goals (0–3 years), liquid, money-market, or ultra-short duration categories may be suitable as they have lower interest rate risk. For 3–5 years, short duration or corporate bond funds with strong credit filters may be suitable.

Hybrid/balanced funds

Hybrid funds mix equity and debt in one, offering equity growth potential with the relative stability of debt. Conservative hybrid funds tilt towards debt, with a smaller equity portion, aggressive hybrids flip that mix. Balanced advantage/dynamic asset allocation funds vary equity and debt exposure based on the fund manager’s analysis and market conditions. Hybrid mutual funds may help investors balance risk, offering relative stability in volatile markets while still participating in potential long-term growth.

Also Read: What are Mutual Fund Units?

How to choose a suitable mutual fund for your goals

Here are some tips that may help when choosing a fund :

Start with the goal, not the fund.

Map each rupee to a timeline - short (0–3 years), medium (3–7), long (7+). For short-term goals, debt funds with high quality instruments may be suitable; for medium-term goals, longer duration debt funds or some hybrid fund categories may be suitable, and for long-term potential wealth building, equity-oriented funds may be considered.

It is also generally recommended to keep expense ratios low. Investors should also look at how the fund has performed across different market cycles instead of relying solely on 1-year returns. Look at consistency of performance and reasonable risk metrics (drawdowns and volatility).

Past performance may or may not be sustained in future.

Tips to potentially maximise Diwali mutual fund investments

Here are some tips that may help investors potentially get the most out of their investments:

Stay disciplined with SIPs

SIP removes the challenge of timing the market and encourages regular investing. If you receive a bonus, staggering it as an SIP into a suitable mutual fund may provide the initial momentum that you need for developing a long-term investing habit. A Diwali bonus or salary hike may also be an opportunity to step up your existing SIP by increasing the monthly contribution.

Diversify wisely

Diversification is not about owning too many mutual funds that all track the same market. The objective of diversification is to reduce risk and enhance overall portfolio stability by spreading investments across assets, potentially helping the portfolio stay relatively resilient through market cycles. A well-diversified porfolio may typically include an equity index for broad low-cost exposure, one complementary category fund (flexi or large & mid cap) for growth potential, and one high-quality debt fund for relative stability.

Watch costs and fees

Costs may compound against you especially over the long term. It is advised to check expense ratios, exit loads, and tax impact. Direct plans may be suitable if you have some investment experience and feel confident choosing funds, while Regular plans via a trustworthy advisor may be more suitable if you require ongoing guidance. Frequent switching is generally advised against.

Common pitfalls to avoid

Here are some common investor mistakes to watch out for:

• Many investors may have the tendency to chase last year’s winners in the hope that past performance will be replicated. Past performance may or may not be sustained in future.
• Overweighting the portfolio with small cap and mid cap funds with the objective of higher potential returns may expose it to high volatility, which may foster emotional decision-making.
• Parking emergency money in equity funds these funds may be volatile in the short-term and hence may not be suitable for an emergency corpus.
• Investing in multiple schemes of the same or similar type may add complexity to the portfolio without necessarily offering meaningful diversification.
• Ignoring rebalancing may allow the equity allocation to creep above your risk tolerance, potentially exposing you to higher volatility than you are prepared for.

Also Read: What are the benefits of investing in mutual funds?

Conclusion

This Diwali, apart from enjoying sweets and selfies, consider starting or expanding your mutual fund portfolio. You could choose two or three funds that match your timelines, automate your SIPs, and write a rebalancing rule that is simple to adhere to. This responsible choice of investing your money instead of spending all of it may be the Diwali gift you give yourself.

FAQs

What are mutual funds and how do they benefit investors?

Mutual funds pool your money with other investors to buy a diversified basket of securities managed by professionals. They offer instant diversification, tight regulation, daily liquidity, and the ability to start small while accessing broad markets.

Which types of mutual funds are suitable during festive investment periods?

There are no such specific mutual funds. The fund that may be suitable for you depends on your financial goals. Festivals may just be an occasion to kickstart your investing habit.

Should I start an SIP or go for a lumpsum investment this Diwali?

It depends on your financial situation and investment goals.

• SIP (Systematic Investment Plan):
  Suitable if you want to invest gradually, reduce the impact of market volatility, and develop a disciplined investing habit. It helps spread investments over time through rupee cost averaging.
• Lumpsum:
  May be considered if you have surplus funds, such as a Diwali bonus or savings, and wish to invest them at once. This can work well if markets remain stable or trend upward after your investment.

Many investors also choose a combination — continuing their SIPs for long-term discipline while deploying extra cash in lumpsum during festive seasons.

How much of my investment portfolio should mutual funds constitute?

The exact share of your portfolio that should go into mutual funds depends on your goals, risk appetite, and investment horizon. The suitable proportion may differ for conservative, balanced and aggressive investors.

What expenses or fees should I be aware of in mutual fund investing?

When you invest in mutual funds, the main cost to note is the expense ratio, which covers fund management and administrative charges. Some funds may also levy an exit load if you redeem units before a set period. Also, while this is not fee, investors should bear in mind that returns are subject to taxation based on the type of fund and the holding period. Always review the scheme documents to understand the exact charges before investing.

How do I balance risk vs return when selecting mutual funds?

Generally, investors may match a scheme’s risk level to their investment horizon. Debt funds for short-term, a blend of equity and debt for medium-term and majority equity for long-term. Limit exposure to highly volatile categories, such as small cap or thematic funds, and rebalance annually to restore target weights as markets move.

Are there tax benefits associated with mutual fund investments started during Diwali?

There are no tax benefits for mutual fund investments made during Diwali.

What mistakes should I avoid when investing in mutual funds around festive occasions like Diwali?

Some common mistakes to avoid may be: emotional and impulsive decision making, treating mid cap and small cap funds as opportunities for quick gains, mixing emergency money with equity, and not reading scheme information and details.

Can I pause SIPs if cash is tight after festive spending?

You may pause SIPs if needed, though it may interrupt compounding and affect potential long-term growth to a degree. You may also consider keeping a few months’ worth of contributions in a separate bank account to encourage consistency and avoid skipping contributions.

What should I do today to get started?

You could list your goals with amounts and dates, pick funds (s) that seem suitable, start an SIP for an amount that is feasible for you and set a calendar reminder to rebalance on the same date next year. This could be one way to make investing part of your Diwali ritual.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.