5 smart tips to optimize your mutual fund returns
Mutual funds are gaining increasing popularity as a preferred investment option, given they offer the scope of earning reasonably higher returns compared to traditional investment avenues. However, merely identifying and investing in the best-performing funds is not enough to optimize your mutual fund returns. There are a handful of strategies you must follow to make the most of your mutual funds.
Here are 5 such smart tips to maximize your mutual fund returns:
Diversify your portfolio
The performance of your mutual fund portfolio depends on the asset classes your mutual funds invest in, the correlation of the asset classes with each other, and market conditions, among other factors. For example, equities and gold are usually negatively correlated to each other. Therefore, when equity mutual funds are falling, gold funds could do well. Understanding these relationships and building a mutual fund portfolio that is spread across varied asset classes offers optimal exposure and shields you from extreme volatility in any one asset class. However, avoid investing in multiple mutual funds that have the same investment style as this could create an imbalance in your portfolio and ultimately impacts your returns.
Optimize asset allocation
Asset allocation refers to dividing your investment across different asset classes such as equity, debt, and commodities to balance your risk and returns. Each individual should have their own optimal asset allocation based on financial goals, risk appetite, expected return, investment horizon, among other factors. Thus, if you are nearing retirement, your asset allocation plan would be very different from that of a person who has just begun their career. The right asset allocation plan matters as much, if not more, than choosing the right funds.
Opt for SIP: Another way to maximize your mutual fund returns is by investing via systematic investment plan or SIP for the following reasons:
- It allows rupee cost averaging, that is, since investing in SIP keeps money flowing into your funds periodically, you buy units in all market conditions. Thus, you end up buying low when the NAV falls and take higher advantage of rising prices when it recovers.
- SIP instills financial discipline through regular instalments, helping you stay invested for the long term and reap the benefits of compounding.
- SIP allows you to invest even small amounts in mutual funds.
- You can increase your SIP amount by a fixed amount at regular intervals via a top-up SIP. This can help you grow your investments in line with your income. Top-up SIPs are also recommended during market corrections in order to maximize your returns.
Keep a check on fund expenses; go for direct plans: Your mutual fund returns are directly impacted by the expense ratio of your funds. Expense ratio refers to the annual fee that investors are required to pay the fund house. Direct plans have a lower expense ratio than regular plans, as direct plans do not include distribution expenses. The savings you make with direct plans stay invested in the fund and eventually contribute to higher returns than regular counterparts. Although the difference in returns would be minimal in the short term, it can be significant over the long term owing to compounding.
However, please note that direct plans are suitable for those who have a better understanding of the markets and mutual funds. It is advisable to go via the distributor prior to taking any investment decision.
Review and adjust your portfolio periodically: While you chalk out your asset allocation plan before starting to invest in mutual funds, it is also important to review and rebalance your portfolio periodically. Examine how your funds are performing in various market conditions vis-à-vis benchmarks and peers. If your fund is consistently underperforming, you may need to redeem them and invest your money in better managed funds. You may also need to rebalance your portfolio based on your changing needs and risk profile.