Making The Most Of Your Mutual Fund Investment

You work hard to earn money, but does your money also work hard to maximise your wealth? When it comes to investments, people are spoilt for options, varying from stocks to gold, and bonds to fixed deposits and government securities. However, each of them carries its benefits and restrictions and therefore selecting the right investment avenue depends a lot on your risk appetite and expected returns. Owing to this scenario, mutual fund makes it an appealing investment option for every class of investors, even if they have a high or low risk appetite.

Since their introduction to the Indian financial market, mutual funds have managed to find their way into every individual’s portfolio. Mutual funds come in a wide variety of forms and can be customised to meet the demands of each individual investor. However, there are numerous instances where investors overextend themselves and overfund their investments. While this may eventually make managing the funds more difficult for the investor and raise the overall investment costs, it does not always produce higher returns.

Still, many investors lament that the returns on their mutual fund investments were insufficient. But a closer inspection reveals a discrepancy in their investing behaviours, particularly in the way they view their investments. This also happens because many investors follow tips that may not have been based on proper research and evaluation. In such cases, going by the flow may hamper the returns. Here are certain factors to consider in order to maximise your mutual fund investment returns.

Defining the Financial Goal
One significant issue is investing on tips. If you are a novice investor, resist the need to believe everything you hear. When you see a lot of people selling their investments short or hear in the news that investments are declining as a result of market turmoil, it’s normal to feel scared. That is because this is how most individuals respond and feeling anxious is normal human behaviour. However, this response will work against you. Gauging your investment tenure should be your first step if you are new to mutual fund investing. How long should you put money aside?

This in turn depends on your ability to adapt to changing market conditions. This is crucial since it will help you determine how much money to invest. Also, consider your financial objectives when choosing your tenure. How negotiable is that if you have a goal in mind? Will you withdraw your money before you reach your objective or are you willing to wait a long time to accumulate the corpus you were hoping for?

You need to be aware that some objectives are non-negotiable, particularly those that are connected to a specific life event. Consider contributing towards child's education, which demands that you have a certain amount saved up by the time your child is old enough to start school. On the day that your child will start school, you cannot bargain. This explains why it’s important to stick with your investments, especially when the money will be used to support a specific or important event because you will need it then.

Investments Grow with Time
The likelihood of developing a corpus in the short term is virtually zero. Investments that appear to be less hazardous, highly gratifying and offer excellent returns will not last. How long should you invest the money should be the first question you ask. You must ask this question to yourself and be prepared to answer it honestly. What kind of negative effects are possible between those two? This question must be answered with the premise that you will continue to invest for the ensuing 10 years. However, the question of whether you can survive market volatility, say if the market falls by 40 per cent, still exists. Looking at your investments every day is one mistake that plenty of individuals do.This results in undue anxiety and a propensity to believe market rumours. 

Mutual funds are a simple investment option as well. In your twenties and thirties, you won't need money for complicated things. Mutual funds are a great option for young investors to invest in because they are simple to purchase, and they will benefit from the power of compounding in twenty-thirty years. You can choose from Equity, Debt, Hybrid Funds, and FOF mutual funds and start investing based on your goal and time horizon. 

Targeting Maximum Gains
Here are some guidelines:
1. Invest via SIP — The best way to invest in mutual funds is through a systematic monthly investment plan (SIP). Over time, every little sum invested through SIP each month would add up to a sizable aggregate. For example, ₹5,000 invested per month through a SIP in an equities fund can earn you ₹25 lakh in 15 years with an annualised return of 12 per cent.
2. Invest as per Risk Tolerance — Those with a high tolerance for risk should focus more on equity funds, those with a moderate risk tolerance should invest in hybrid funds (which combine equity and debt) and those with a low tolerance for risk should concentrate more on debt-related funds. For instance, Quant Small Cap Fund gave an annulised returns of 52.1 per cent in the past three years. This does not imply that you will always receive such returns. However, investing according to your risk tolerance would enable you to earn high returns.
3. Spread Fund Categories — Invest in a variety of fund types such as Large-Cap, Mid-Cap and Small-Cap funds since all perform differently over time and in various market environments. Therefore, investing in different types of funds would assist you to receive the best profits. For instance, if you check the Nippon India Small Cap Fund, the focus of the fund is on potential growth companies. This fund outperformed others, providing 12.17 per cent gains in the previous year and annualised returns of 19.48 per cent over the previous five years. Mid-cap funds won’t always offer these returns but investing in such mid-cap funds will enable you to earn the highest return over time.
4. Invest in Sectors Anticipated to Outperform — Highrisk investors are those who are prepared to take chances and invest in high-risk funds like sector funds. Such individuals can think about investing in funds in industries that are anticipated to do better in the near term. For example, even if the infrastructure sector has peaked, it is still predicted to perform better over the next three to five years. The best option would be to think about infrastructure funds or banking funds which would indirectly stimulate the infrastructure sector through finance for the short-term to medium-term of three to five years.
5. Research your Investments — Investors frequently put their money in the wrong funds or have a misunderstanding about the fundamental idea that mutual funds must be held for the long term. Never invest just because a mutual fund scheme has generated 100 per cent returns in a single year. You should be aware that if there is a market crash, such a fund could deplete your capital. Based on your financial objective, invest in mutual funds. For instance, you want to set aside ₹30 lakhs for your child’s international studies in the next 15 years. You can easily accomplish this aim if you can invest ₹6,000 each month for 15 years in a well-diversified mutual fund portfolio generating annulised returns of 12 per cent. Consequently, you should base every investment you make on a specific objective.

Equities versus Debt Funds
Debt funds produce steady returns with less risk. Equity funds, on the other hand, invest in company shares and are vulnerable to market risks. Mutual funds give investors access to both debt and equity, letting them choose based on their level of risk tolerance. However, if an investor’s risk tolerance decreases with age, an aged investor will spend more money on debt choices, which will produce a consistent return. Returns from equity investments are higher than from debt investments. An individual can increase exposure by 10 per cent to 15 per cent more than the recommended limit if they have a higher risk appetite. 

Different Types of Mutual Fund Returns
Absolute Returns: Absolute returns, also known as point-topoint returns, show the percentage gain or reduction in investment. The duration of this modification is not considered. Mutual funds having a term of less than a year compute returns using the absolute returns approach. The investor must calculate annualised returns if the timeframe is longer than a year.
■ Annualised Return— As the name suggests, annualised returns calculate the annual rise in the value of your investment. For example, if you had invested ₹1 lakh in a mutual fund scheme, your initial investment would rise to ₹1.4 lakhs over three years. In this instance, your absolute return is 40 per cent, but due to the compounding effect, your annualised return is only 11.9 per cent.
■ Trailing Returns — The annualised return over a specific trailing period that ends today is known as the trailing return. It can be one year, three years, or year-to-date (YTD). Most importantly, the metrics that are most pertinent for assessing a fund’s performance are its trailing returns. They are used by fund houses to publish performance over different time blocks.
■ Rolling Returns — Rolling returns are the average annualised returns analysed over a specified time period which can be daily, weekly or monthly. Basically, it periodically evaluates the fund’s absolute and relative performance over some time. Rolling returns examine the performance of the fund over multiple blocks of three, five or ten years at varying intervals, which makes this return more representative of the fund’s actual performance. 

SIPs for Best Possible Returns
■ You should begin early and make systematic investments (SIP) over very extended timeframes, ideally 10 years or more.
■ Even when the market is volatile, you should continue to be diligent with your SIP investments. SIPs help you during periods of turbulence by averaging the purchase price in rupees.
■ You can achieve your financial goals more quickly and amass more money by raising your SIPs each year in proportion to your income growth.
■ You should strategically invest in lump sum during periods of extreme volatility.
■ The performance of your SIPs should always be periodically reviewed to determine whether you are on track to meet your financial objectives. If necessary, you should seek the assistance of a financial expert.

Invest in Lump Sum During Market Correction
It’s a stated fact that regardless of the market situation, SIPs are the best investment options for long-term financial goals. Occasionally, however, equity markets offer very attractive investment opportunities that you can seize by strategically making a lump sum investment. If you have the cash, we believe that a price correction of 20 per cent or more offers good opportunities for lump sum investments. You can put your lump sum cash in a liquid fund and then invest from the liquid fund to an equity fund through a systematic transfer plan (STP) over a period of three to six months if you are concerned that the market may fall even further.

Conclusion
Without a doubt, investments in mutual funds can multiply an investor’s wealth. However, investors must also make sure that their portfolio is well-balanced with the appropriate quantity of investments. When creating a portfolio, the adage ‘not too much and not too little’ should be followed. Most experts also agree on the fact that including more than 6–8 mutual funds in a portfolio crosses the line into overdiversification.