Over the last few decades, mutual funds have gained massive acceptance amongst a huge section of investors. The rise in acceptance is owing to its potential to generate higher returns than fixed-income instruments over the long term. Note that you as a retail investor can further enhance your mutual fund returns by following specific strategies. Here are 4 major strategies, which you must be aware of –
- Assess your risk tolerance level
Before you invest in mutual funds, ensure to examine your risk tolerance level and the time horizon to achieve your financial goal. Accordingly, choose the mutual fund that will assist you to attain your prioritized financial goals. For instance, if you want to form a specific corpus in the next 5 years and your risk tolerance level is high. You can opt for a fund in equity mutual funds that offer high returns as per your risk tolerance level to form your desired corpus to attain the goal within 5 years. You can use an online SIP calculator, to compute the estimated amount you must invest monthly in a specific mutual fund to achieve your corpus within the estimated time horizon.
- Diversify your investments
The return generated by different mutual funds varies based on the investment measures adopted by the fund managers, the asset classes they have invested in, the kind of fund categories the mutual fund belongs to and the prevailing market and economic conditions. For instance, certain asset classes such as equity and gold hold a negative correlation with one another. Gold generally does well in times of geopolitical and economic uncertainties while equities tend to falter in such conditions. Likewise, short-term debt mutual funds outperform long-term debt mutual funds in the course of the rising interest rate regime scenario and vice versa. Hence, a well-designed portfolio diversification across different asset classes and fund houses would assist in yielding optimum risk-adjusted returns based on your risk appetite and your financial goals’ investment horizon.
- Go for the SIP (Systematic Investment Plan) option
A SIP allows you to invest a predefined amount at periodic intervals, say monthly, weekly, quarterly, etc., in a mutual fund. As the amount for the SIP is deducted automatically from your savings bank account on a predefined date, it allows financial discipline and regular investment. Additionally, the minimum amount for equity mutual fund investment is generally as low as Rs 500, which allows you to make the most out of equity investments even with a smaller monthly surplus.
Automated and regular investment features in systematic investment plan ensure rupee cost averaging by purchasing a higher number of units at reduced NAVs (net asset value) during bearish markets. It assists in averaging investment costs and removes the requirement to monitor the market as well as time your investments.
- Assess the performance of your fund periodically
Periodical assessment of your mutual fund is as crucial as a regular investment in mutual funds. Doing this permits you to keep track of your mutual funds’ performance in distinct conditions with respect to their benchmark indices and peer funds. Note that even top-performing funds with previous outstanding returns can become nonperformers in future. Thus, make sure to compare your funds’ past 1 year returns with their benchmark indices and peer funds at least once every year. In case your existing funds continuously underperform their benchmark indices and peer funds over the last 3 years, ensure to redeem them for high-performing funds.
Ending note
Mutual funds have emerged to be a preferred choice by most. Out of them, often first-time mutual fund investors tend to be hesitant and confused about how to go about it after choosing the best mutual funds. Above-mentioned are crucial strategies that can help you generate higher returns on your mutual fund investment.
