1. How to invest in mutual funds profitably: 5 point strategy for boom times

How to invest in mutual funds profitably: 5 point strategy for boom times

Equity mutual funds have seen positive inflows since 2014 and surged after demonetisation as retail investors switched from physical to financial savings.

By: | Published: November 8, 2017 3:29 AM
Equity mutual fund schemes, that account for one-third of total assets under management of fund houses, have observed a growth rate of 40% since FY14.

Equity mutual funds have seen positive inflows since 2014 and surged after demonetisation as retail investors switched from physical to financial savings. Investors are increasingly shifting savings from cash and term deposits to systematic investment plans (SIPs) of mutual funds and even lump sum investments. Equity mutual fund schemes, that account for one-third of total assets under management of fund houses, have observed a growth rate of 40% since FY14. A study by Emkay Equities Research says that historical cycles indicate that booms in mutual funds flows last for three years, which is equal to the duration of the current upswing. But, in contrast to earlier cycles, the report underlines, this time the rally is sans any material improvement in fundamentals. “Previous booms of 1992-1996, dot com bubble and 2004-2008 suggest that triggers for a down cycle emanate mostly from global markets. High frequency data indicate that if FIIs remain net sellers for a long time, it would put at risk the present lofty market valuations, especially in the mid-cap index, which in turn can lead to redemption of MF flows,” the report says.

So, in such a case, what should be your strategy to invest in mutual funds?

Invest according to your goals

Before investing in any fund, understand your objective and the time period. If you are looking for short-term needs, look at debt funds. If a larger corpus is required, especially for retirement or buying a house, invest a larger part in equity funds, especially in diversified funds for a longer duration.

Look at track record of schemes

Investors should not get attracted by low priced net asset values as they do not mean the funds are cheap. Compare returns, expense ratios, sectoral exposure of funds, Sharpe ratio, fund manager’s track record before investing in a particular fund. Also do not look at short-term returns as they can give a wrong picture.

Experts suggest choosing a maximum of 4-5 schemes, which can be easily tracked. Compare the returns since the return variability between various schemes is very minimal, especially in debt, index and passive funds.

Invest through SIPs

Even in conditions of high market valuations, never time the markets. No expert knows when to enter and exit the stock market and investing lump sum or upfront is risky as any subsequent large fall in stock market may remove the gains, if any, or might even reduce the value of initial investment. A Systematic Investment Plan can create wealth by investing small sums of money every month over a period of time. Investing every month ensures that one is invested during the highs and the lows.

One must start investing at an early age as the longer the investment horizon, bigger the benefits. If you start early, equity funds should constitute 80% of your portfolio as this asset class has been found to be the best bet for growing money over the long term.

Diversify investments

Diversification of investments will help you to cushion market fluctuation and volatility. One should look at assets such as equity, debt and gold. Mutual funds have cost-effective schemes in all these asset classes. One should allocate funds depending on one’s risk profile and age. Investors should opt for online facilities to invest or redeem, as it saves time and money.

Do regular follow-ups

Retail investors must do regular follow-ups and not get bothered by short-term volatility. Investing in equity mutual funds is a long-term affair, which is exposed to short-term market volatility. It may test the investors’ patience; hence, a long-term investor need not worry about short lived fluctuations in returns. As mutual fund investments are done by experts, they do not require daily monitoring by retail investors. Review your folio once a quarter to check their performance.

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