Top ways to optimize your mutual fund returns

 

 

When making small, frequent investments in the stock market, mutual funds are a wise choice. The benefits of investing in mutual funds lie in the services provided by fund managers, who are experts employed by mutual fund companies to manage assets in a way that generates returns that outpace the index. However, if you rely solely on fund management as an investor, things could go wrong.

It takes more than just purchasing the top-performing funds to get the most return on your mutual fund investments. Experts say you can increase your return on investment by periodically evaluating the performance of your portfolio.

Investors can increase mutual fund returns by putting these five methods into practice. So let’s get started with the former right away.

Select direct funds

Investing in a direct plan can increase returns on investment by 1 to 1.5 per cent.

Because they save investors from having to pay fund houses a brokerage fee, which typically amounts to one to one and a half per cent of the investment amount, direct plans are preferable to traditional mutual funds. Investors receive a higher return on investment from a no-load fund compared to a normal fund.

The cost that is assessed when buying fund shares is known as the mutual fund load. The fund managers receive payment for their advice and services in the form of a load. As a result, the investor would have to pay Rs 100 upfront as a 1 per cent purchase fee for the fund for a total investment of Rs 10,000. Thus, the investor uses Rs 9900 to start their investment. One can receive more units and avoid paying costs by selecting a direct plan.

Go for SIP over a lump sum

A systematic investment plan, or SIP, is advantageous for investing in mutual funds. It’s a clever method of gradually accumulating units with little, regular payments. SIP doesn’t require investors to time the market, in contrast to lump-sum investing.

When making a lump-sum investment, it is best to wait until the market has reached its lowest point before making the investment. But since it’s hard to measure, SIP, which uses money cost averaging, is a superior option.

Choose to invest in index funds

These passively managed funds have low costs, like direct plans. However 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.

Diversify

One can minimize risk and maximize profit from a variety of asset classes by using diversification. Depending on their tolerance for risk, investors can choose to invest in small, mid, or large-cap mutual funds. A high-risk investor, for instance, would put more money into small-cap funds—a high-risk, high-return investment—and allocate lesser amounts to large-caps, index funds, and mid-cap funds.

Debt vs equity investment

Debt funds give a steady, risk-free return. Equity funds, on the other hand, are vulnerable to market risks and invest in company shares. Mutual funds give investors exposure to both debt and equity, giving them the flexibility to choose based on their level of risk tolerance.

But as an investor gets older and less willing to take on risk, they will put more money into debt choices, yielding a consistent return. As a general guideline, one should deduct their age from 100. Exposure to equity investments ought to be the end result. Investments in equity yield larger returns than in debt funds. An individual can raise their exposure by ten to fifteen percent above the recommended limit if they have a higher risk appetite.

 

Investors in mutual funds should frequently assess their investment performance and reallocate funds as needed. To make sure everything is on track, experts advise evaluating it once or twice a year. Additionally, before creating an exit strategy, investors should review the industry’s performance if the fund’s performance falls short of their expectations.