How to get more returns from mutual fund investments

Experts believe the previous year, 2017 to be a watershed period for India’s mutual fund industry. Even though there has been a steady increase in the inflows since the start of the year that has led to creation of new records for the industry, but the same might not be easy to break in 2018. With more and more investors coming to invest in mutual funds, there is also a dilemma in the minds of an investor whether to start investing without thinking about returns in the short-term or to look for profits in the long term.

The following tips can help you to maximize your mutual fund returns:

Diversify your investments

There is a SEBI directive about too many similar schemes from the same AMC which need to be changed and categorized in a standard manner so that it is easily understandable by the investors. Therefore, it is advisable that investors should understand what category of scheme they are investing in and what is the scheme objective? Investors must diversify across various scheme categories and scheme asset class like debt or equity or gold funds etc. This helps to create a hedge against uncertainties and also in benefiting from the returns of different assets. However, investors should maintain a cap on the number of schemes in the portfolio and avoid chances of over diversification that may adversely impact the returns in the long term.

You may like to read how to invest in mutual fund schemes: tip and facts

Invest based on risk profile and financial goals

Investors should consider their ability to take risk to get potentially high returns from their investments. They should also understand the potential risk of loss of the principal amount invested into mutual funds due to market volatility. People who are younger will be able to handle a higher level of risk and they can earn potentially high returns by focusing almost exclusively on equity investments.

Are you risk averse – understand your risk capacity

With age, responsibilities increase and so the requirement of liquidity, which can be achieved by increasing allocation to debt and debt-oriented investments. An investor should also consider the financial goals he/she have and the basic reason of investing. This will help choose schemes that caters to the investors requirement– For example - people investing for retirement will find equity funds to be ideal while ELSS funds will be the obvious choice in case of tax savings.

Read what is asset allocation and market cycles

Follow a blended investment strategy

Basically, there are two styles of investing: lump sum investing and systematic Investing or SIPs. Seasoned investors who understand equity markets or those with very long term investment horizon may opt for lump sum investments while new investors or those who have investible surplus every month post meeting necessary expenses can ideally invest through SIPs.

Did you know what are mutual fund SIPs and its benefits?

Even though they both have disparate styles but they have their unique benefits, if done correctly. An investor can purchase units at low prices by timing purchases when markets are low with the strategy of lump sum investments. Alternately investors can make investments in a regular manner without worrying about the need to time the market. Additionally, there is also the benefit of compounding and rupee cost averaging in SIPs. Investors can choose their style keeping their financial goals in mind and to maximize their returns. They can decide on the allocation into different styles as well as how much to invest through each route based on their unique investment requirements.

Keep lump sum investments in debt instruments

In order to make lump sum investments, you need to keep quite a bit of money handy as the larger the amount invested in one go, the better. However, if you keep large sums of money in your savings account earning 3.5% to 4%, that would probably not generate much in terms of returns. Instead, consider parking your excess money in ultra-short term funds or liquid funds which offer superior returns as compared to savings bank account and feature near zero risk. You can also make systematic investments into other schemes by systematically redeeming your existing liquid / ultra-short term funds – this process is termed as STP or systematic transfer plan. This technique ensures that overall you are in a better position to receive higher returns on your investments as compared to others entering into the exact same schemes.

Please check how a STP works from liquid funds to equity funds and also read how STP is a useful mechanism to manage asset allocation

Periodically check your returns

It is important for an investor to understand that building a robust diversified investment portfolio is not a one-time activity and an investor should ensure the viability of the chosen investments over time. Therefore, a periodic check, say annually, should be done by an investor to know the returns of the existing investments. Many options, including reducing your exposure to certain investments, can be considered when one or more of your existing investments are not performing as per expectations.

Some experts believe temporary issues with respect to returns in case of equities get sorted in the long term and an investor should not panic and redeem investments hurriedly. However, this can be considered as a judgement call and varies from one investor to another as well as from one mutual fund scheme to the other.

However, investors who are new to investing should avail the services of a mutual fund advisor as that would be vital for making the correct assessment.

You may like to read how to build the perfect investment portfolio

Be careful about sectoral or thematic mutual funds

The mutual fund schemes that invest in a specific theme or a sector of the economy are known as thematic or sector-specific mutual funds. An investor will be able to get substantial returns from these funds when the specific sector is booming. However, special care should be taken considering the cyclic nature of these funds since the boom phase of a sector may be followed by a dull phase, which can last for many years. People who are new to investing get into thematic or sector-specific funds during their boom phases when there is high returns in the short term and the medium term. It is the starting point for a disastrous recipe with respect to future returns when they end up investing in these funds when their prices are high. Subsequently, new investors panic when the bust phase of the sector starts and they watch their investment get eroded and start the process of redeeming their units for either low profits or at a loss.

Financial experts advice to either stay away from sectoral and thematic funds if investors risk taking appetite is not very high or allocate only a small portion (maybe 10-15%) of the total portfolio into these funds.

You must read how to select mutual funds based on your investment needs

Consider NFOs selectively

These days New Fund Offers or NFOs are a trend in the mutual fund industry as the industry is booming. A NFO represents a new fund which has no prior investments and therefore, there is no benchmark to determine what course the fund’s performance would take in the future! There are even NFOs that are closed-ended without any option of redemption during the locked-in period.

Investors mostly get attracted by the low NAV, which is seen as the main selling point for NFOs. Since a fund that has no track record cannot have a low or high NAV, there is in fact no criterion for making the comparison.

Investors should, therefore,evaluate the NFOs before investing. For example – a new fund house (AMC) may come out with large cap equity fund NFO whereas in your portfolio you already have large cap funds. Therefore, you should stay away from this NFO. Bringing a large cap equity fund NFO maybe the compulsion for the AMC as they might not have a large cap equity fund scheme in their product basket, but there is no compulsion for you to invest in these funds.

Read to invest or not to invest? How Naina demystified mutual funds

Conclusion

Nobody can predict the market directions. However, Mutual funds provide a harbor to your hard-earned money. Investors can accomplish their goals of earning high-yielding returns on their investments by opting for a disciplined investment approach suiting their respective risk profiles. People should understand that mutual fund investments are market-linked and there is no certainty when it comes to markets. However, by making adequate efforts to implement the above suggestions and staying invested for the long term, an investor will be better placed to maximize the returns from mutual funds when compared to investors who are investing just because investing in mutual funds are the ‘in thing’ these days!