Ten strategies to optimise your mutual fund returns
Mutual funds are popular among large sections of retail investors because they offer investors the opportunity to diversify and therefore spread out their risk over several investments. Mutual funds are managed by full-time, professional fund managers who have the expertise, experience, and resources to actively buy, sell, and manage investments. A fund manager of Mutual Fund continuously monitors investments and rebalances the portfolio accordingly to meet the scheme’s objectives. Thus, investment in mutual funds is useful to those with limited time to have a piece of a professionally researched and managed portfolio. Primarily, returns generated by mutual funds are attractive, in a scenario of declining returns both on debt and equity and declining returns posted by bank FDs and small saving schemes due to the falling interest regime prevalent during most of the last decade.
Retail investors can increase their returns from their mutual fund investments by adopting these smart strategies. Key strategies for mutual fund investing include clear goal setting, the consistent contributions. and an understanding of your risk tolerance.
Goal-based investing: Every individual has financial goals that he needs to reach in the short, medium, or long term period. You may want to own a home, or a bigger car, fund your child’s education, or have a financially protected retirement. Investing regularly to be able to reach the respective financial goal is called goal-based investing.
Consistent contributions: Consistent investing is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period regardless of price. SIP (Systematic Investment Plan) enables you to invest a predetermined amount at regular intervals, say, weekly, monthly, quarterly, etc., in a mutual fund. Since the SIP amount is debited automatically from your savings account on a predetermined date, it ensures regular investment and financial discipline. Moreover, the minimum amount for investing in most equity funds can be as low as Rs 1,000 (Rs 500 in the case of ELSS funds), which allows investors with even limited monthly surpluses to benefit from investing in equities.
Understanding of your risk tolerance: Investing always comes with risks as different factors can have an impact on the markets. Risk tolerance is your ability and willingness to stomach a decline in the value of your investments. When you’re trying to determine your risk tolerance, ask yourself how comfortable you will feel maintaining your positions when the stock market is experiencing large declines. Several factors determine the level of risk an investor can afford to take. Knowing the risk tolerance level helps investors plan their entire portfolio and will drive how they invest.
Tax implication: Further, you need to understand the tax implications of your mutual fund investment, and understanding how mutual fund fees work is crucial for optimizing your returns.
Match your investments to your goals: Goals are big-picture financial objectives you set for how you want to save and spend your money and opt for investments by matching their holding period to reach in the short, medium, or long term period.
Spread your ‘eggs’ among multiple baskets: The returns generated by various mutual fund schemes differ drastically depending on the fund managers’ investment calls, asset classes they are invested in, the type of fund categories those funds belong to, and the overall economic and market conditions. Diversification is a risk management strategy that creates a mix of various investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt to limit exposure to any single asset or risk. This practice is designed to help reduce the volatility of your portfolio over time. However, one should avoid falling into the trap of over-diversification or buying multiple funds with the same investment style and strategies. Too many funds within the portfolio would make it difficult to track the funds’ performances and can even adversely impact your overall portfolio returns.
Don’t try timing the market: Market timing is when you move your money in and out of equities to try and capture the performance highs and avoid the lows. It’s extremely risky, and even the most experienced investors get tripped up by it. If you sell your stocks during a down period, you may lose out on gains if prices go back up again. Keep in mind that historically, the stock market has recovered from broad slumps, although past performance is no guarantee of future results.
A long-term investment approach is essential to weather short-term market fluctuations and achieve sustained growth.
Review your fund performance periodically: You should regularly monitor your funds. This can involve reviewing your portfolio every three to six months and Staying regularly informed about the funds’ performance. Doing so will allow you to track your funds’ performances in the different market conditions vis a vis its peer funds and benchmark indices. Remember, “Past performance is no guarantee of future results” is generally treated as a warning label: Don’t assume an investment will continue to do well in the future simply because it’s done well in the past. Therefore, review your portfolio every three to six months and stay regularly informed about the funds’ performance. In addition to regular monitoring, it’s important to conduct a thorough review of your mutual funds at least once a year. If your existing funds constantly underperform their peer funds and benchmark for the past 3 years, consider redeeming them for better-performing funds.
Direct plans over regular plans: Direct Plans’ and ‘Regular Plans’ are both parts of the same mutual fund scheme, have the same/common portfolio, and are managed by the same fund manager, but have different expense ratios (recurring expenses that are incurred by the mutual fund scheme). Direct plans have lower expense ratios than their regular counterparts as the fund houses do not incur distribution expenses in the case of direct plans. The savings in distribution expenses remain invested in the fund, which starts generating returns on its own over some time due to the power of compounding. All these factors lead direct plans to register higher returns than their regular counterparts. While the difference between the returns generated by direct and regular plans of the same scheme may seem trivial during the initial years, the difference would become significant over the long term due to the compounding effect.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. The article should not be construed as solicitation material. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a purchase. Working with a financial advisor often leads to better investment decisions and greater long-term asset growth.