5 smart strategies to maximize your mutual fund investment returns

fund investment returns


While investment in a mutual fund, particularly equity funds, has some associated market risk, the best part is it is managed by professional mutual fund managers. Such professional fund managers are hired by fund houses to maximise your returns on mutual funds. However, being solely dependent on professional managers concerning your mutual fund investments is not recommended. You as a retail investor must be vigilant about your investments if you want to enhance your mutual fund returns. Discussed here are 5 smart strategies to enhance your mutual fund investment returns –

Diversify your portfolio

Returns generated by distinct mutual fund schemes vary drastically based on the investment calls by the fund managers, asset classes they consider investing in, the kind of fund categories those mutual fund schemes belong to and thorough market and economic conditions. For instance, a few asset classes like equity and gold hold a negative correlation. Gold funds generally perform well during geopolitical and economic uncertainties while equity mutual funds underperform in such scenarios.

Likewise, during a rising interest rate regime, short-term debt mutual funds perform better as compared to long-term debt mutual funds. Thus, forming a diversified portfolio through optimum exposure to distinct mutual funds and within asset classes can assist in yielding optimum risk-adjusted returns depending on your risk tolerance level and your goal’s time horizon.

Determine a well-planned asset allocation strategy

As an investor, you may be influenced by your family and friends and invest as per their suggestions. Such investments may not match your risk tolerance level and investment time frame. A fundamental step towards this is to zero in on an asset allocation strategy. An asset allocation is a process of disseminating your investments throughout distinct asset classes based on your risk appetite and investment time frame. For example, as equities hold the potential to better perform than inflation and fixed-income instruments by a huge margin over the long term, your financial goal investment maturing within 5 years or above must be in equities. Similarly, as equities hold the chance of being volatile over the short time period, you must opt for debt funds to mitigate your goals maturing in 3 years. This is because, debt funds tend to endow higher capital preservation and income certainty features than equities. Thus, by determining a well-planned asset allocation, you can gain optimum risk-adjusted returns on your mutual fund investments and meet your financial goals on time.

Evaluate your risk tolerance level

When you consider mutual funds to invest in, the basic thumb rule to consider is your risk-taking potential which thoroughly depends on your age. When you make mutual fund investments at a young age, between 20-30 years, it is recommended to invest a major portion of your investible money in equity mutual funds. As you become older, you should gradually shift your equity exposure to debt mutual fund instrument for capital preservation. You can use the STP (systematic transfer plan) mode to automatically transfer the amount in equity fund to debt funds. Shifting steadily from equity to debt mutual funds permits you to consolidate your overall gains while lowering the downside risk.

Opt for the SIP (systematic investment plan) mode

An SIP is a prudent route to invest in mutual funds. With this mode, you can invest a predefined amount at periodic intervals in a selected mutual fund scheme. As the SIP amount is deducted automatically from your savings bank account on a predefined date, it ensures financial discipline and periodic investment. Additionally, the minimal amount for mutual fund investment through the SIP mode usually starts from Rs 500, which permits you to begin your market-linked investmentswith even minimal monthly surpluses.

Such automated and regular investments even endow you with the benefit of rupee cost averaging by purchasing more units at lower net asset value (NAV) during bearish market phases. This assist in averaging your cost on investment and removes the requirement to monitor the market as well as the time your investments.

Periodically review your mutual fund performance

After you have invested in mutual funds, you must ensure to compare your mutual fund schemes’ performance with its benchmark indices and peer funds quarterly to understand whether you are on the right track. In case if any fund underperforms continuously for over a year, make sure to liquidate them for a better performing mutual fund scheme.

Bottom line

So, if you are looking to begin your mutual fund investment journey, it is a must to study distinct financial strategies to make an informed decision before investing your investible funds. Once you have understood the market, and selected the mutual fund scheme, you can then follow the preferred technique as per your risk tolerance level and financial situation to meet your financial goals.

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