5 ways to optimise mutual fund returns

Today’s new-age Indian investors are increasingly turning to mutual funds for adding diversification to their investment portfolios. The major appeal of mutual funds lies in their potential to generate returns while spreading risks across varied asset classes. Due to the evolving market and growing expectations, optimising mutual fund returns has become essential for these investors.

Through this article, let’s understand how to optimise mutual fund returns for achieving financial goals.

• Table of contents

1. Why are mutual funds important?
2. How to optimise mutual fund returns?
3. FAQ

Why are mutual funds important?

Mutual funds help investors get access to a diversified portfolio managed by professional fund managers. These investment vehicles pool money from multiple investors to invest in stocks, bonds, or other assets. The significance of mutual funds lies in:

Diversification:Investors benefit by spreading their investments across a range of securities, reducing the risk associated with individual investments.

Professional management:Fund managers bring expertise and make informed investment decisions aligned with the fund's objectives. This can help in potentially yielding better returns.

Accessibility: Mutual funds offer accessibility to various asset classes, allowing investors with different risk appetites to find suitable investment options.

How to optimise mutual fund returns?

1. Asset allocation strategy

Diversification across asset classes is important for managing risk and enhancing returns. Evaluating the risk tolerance and investment horizon helps in constructing a balanced portfolio. Equities offer growth potential but come with higher volatility, while debt instruments provide stability but lower returns. A diversified mix – including equities, debt, and other assets like commodities or real estate – helps spread risk and boost the overall return potential.

2. Regular monitoring

Consistent monitoring of fund performance, expense ratios, and portfolio diversification is crucial. Regular reviews allow investors to track the fund's progress against benchmarks, ensuring it remains aligned with their financial goals. Analysing expense ratios helps evaluate the cost efficiency of the scheme. Additionally, assessing portfolio diversification ensures a healthy spread across various sectors and industries to mitigate concentration risks.

It's important to note that even top-performing funds that have delivered exceptional returns in the past might not sustain their performance in the long term. Therefore, it's advisable to periodically assess your funds' performance. Compare their returns over the past year with those of similar funds and benchmark indices at least once annually. If your current funds consistently lag behind their peers and benchmarks for three consecutive years, it might be prudent to consider switching to better-performing funds.

3. Systematic investment plan (SIP)

SIPs offer a disciplined approach by investing fixed amounts at regular intervals. This strategy takes advantage of rupee cost averaging, where investors buy more units when prices are low and fewer units when prices are high, thus reducing the average cost per unit. SIPs help in sailing through the market volatility, improving the long-term return potential while also instilling financial discipline.

4. Tax-efficient investing

Utilising tax-saving mutual fund options like Equity-Linked Savings Schemes (ELSS ) offers the dual benefit of tax savings under Section 80C of the Income Tax Act and opportunities for long-term wealth creation. ELSS funds come with a lock-in period, encouraging investors to stay invested for the long haul while enjoying tax benefits.

5. Long-term perspective and patience

Maintaining a long-term investment horizon is vital for reaping the benefits of compounding and riding out market fluctuations. Frequent portfolio changes could lead to transaction costs and hamper the overall returns. Patience during market downturns is key as history shows that markets tend to recover, rewarding patient investors who stay the course.

Conclusion

Optimising mutual fund returns is essential for new-age Indian investors seeking to build wealth to achieve their financial milestones. Strategic asset allocation, regular review, SIP investments, tax-efficient choices, and a patient long-term approach can serve as pillars for maximising the return potential while managing risks effectively.

FAQs:

Are mutual funds suitable for short-term investments?
While some funds cater to short-term goals, mutual funds are generally better suited for medium to long-term investment horizons to benefit from compounding and mitigate the risk of market fluctuations. Short-term investments could lead to transaction costs and a relatively lower return potential.

How often should I review my mutual fund portfolio?
Regular reviews, preferably quarterly or semi-annually, help ensure alignment with financial goals and changing market conditions.

Can SIPs guarantee better returns compared to lump-sum investments?
SIPs provide the advantage of rupee cost averaging but do not guarantee better returns. The returns depend on market performance and the fund's underlying assets.

What should be the ideal investment horizon for mutual funds?
The ideal investment horizon varies based on individual financial goals. However, a longer horizon, typically 5-7 years or more, allows for potential growth and better returns through compounding while minimising market risks.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.