Mutual funds are a smart way to invest in the stock market with small regular investments. The best part of investing in mutual funds is the service of the fund managers - professionals hired by the mutual fund companies to manage funds to earn index beating returns. But as an investor, depending entirely on fund managers may backfire.
Generating the best return from mutual funds investment is more than just buying the best performing funds. According to experts, reviewing portfolio performance time-to-time can help you earn more from your investment.
Investors can practice these five steps, which will improve mutual funds returns. So, without further ado, let's begin our discussion.
Select direct funds
Choosing a direct plan will help investors earn 1 to 1.5 percent more return on investment.
Direct plans are better than regular MF investment since it allows investors to avoid paying brokerage to fund houses, which is often 1 to 1.5 percent of the investment size. A no-load fund puts more money into the investors' pocket than regular funds.
Mutual fund load is a fee charged while purchasing shares in the fund. The load is paid for the advice/śervices rendered by the fund managers. Hence, for a total investment amount of Rs 10000, the investor would have to pay Rs 100 upfront as 1 percent charge for buying the fund. So, the investor begins investing with Rs 9900. By choosing a direct plan, one can avoid paying the fees and get more units.
Go for SIP over lumpsum
Mutual funds investing benefits from a systematic investment plan or SIP. It is a smart way to accumulate units with small regular payments gradually. Unlike lumpsum investing, SIP doesn't require investors to time the market.
To maximise return with a lumpsum investment, one needs to wait for the market to hit bottom before putting the money. However, since it is difficult to gauge, one is better off with SIP as it works on the money cost averaging.
Choose to invest in index funds
These passively managed funds are low costs like direct plans. But, the primary advantage of index funds is that it is designed to mimic the performance of the market index. It helps avoid manager risk, which may cause an actively managed fund to produce a lower return.
The low-cost, low-risk funds have a marginal advantage over the actively managed funds, which depends on the decision making of the fund manager.
Diversification helps one to minimise risk and optimise the return from different asset classes. Investors can select to diversify according to their risk appetite and select to invest in small-cap, mid-cap, and large-cap mutual funds. For example, a high-risk individual will allocate more funds in small-cap funds - a high-risk, high-return option, and smaller ratios into mid-cap, index funds, and large-caps.
Debt vs equity investment
Debt funds generate a risk-free, predictable return. On the other hand, equity funds invest in company shares and are subject to market risks. Mutual funds offer exposure to both debt and equity, allowing investors to select according to their risk appetite.
However, as the risk appetite of an investor declines with age, a senior investor will allocate more funds on debt options, which will generate a steady return. The thumb rule is to subtract one's age from 100. The result should be one's exposure to equity investment. Equity investment generates higher returns than debt funds. If an individual has a higher risk appetite, he/she can increase exposure by 10-15 per cent more than the prescribed limit.
The Bottom Line
Mutual fund investors should review the performance of their investment periodically and reallocate funds if necessary. Experts recommend reviewing once or twice a year to see it is on track. And, if the fund performance is less than expected, then investors should check the industry performance before making an exit plan.