Mutual Fund: 5 smart strategies to optimise your mutual fund returns

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November 17, 2020 10:39 AM

Retail investors can further increase their returns from their mutual fund investments by adopting these smart strategies.

Periodical review of your mutual funds at regular intervals is as important as regular investing in mutual funds.

Mutual funds have gained growing acceptance among large section of retail investors over the past decade. The reasons are primarily attractive returns generated by mutual funds, both debt and equity, and declining returns posted by bank FDs and small saving schemes due to the falling interest regime prevalent during most of the last decade.

Retail investors can further increase their returns from their mutual fund investments by adopting these smart strategies.

1. Diversify your investments

The returns generated by various mutual fund schemes differ drastically depending on the fund managers’ investment calls, asset classes they are invested in, type of fund categories those funds belong to and the overall economic and market conditions. For example, some asset classes like gold and equity have negative correlation with each other. Gold funds usually do well during economic and geopolitical uncertainties whereas equity funds usually falter during such uncertainties.

Similarly, short term debt funds perform better than long term debt funds during rising interest regimes and vice versa. Thus, a well-implemented portfolio diversification through optimum exposure to various funds across fund houses and across/within asset classes would help in generating optimum risk-adjusted returns on the basis of an investor’s risk appetite and time horizon of his financial goals.

However, one should avoid falling into the trap of over-diversification or buying multiple funds with the same investment style and strategies. Too many funds within the portfolio would make it difficult to track the funds’ performances and can even adversely impact your overall portfolio returns.

2. Opt for the SIP route

SIP enables you to invest a predetermined amount at regular intervals, say, weekly, monthly, quarterly, etc, in a mutual fund. Since the SIP amount is debited automatically from your savings account on a predetermined date, it ensures regular investment and financial discipline. Moreover, the minimum amount for investing in most equity funds can be as low as Rs 1,000 (Rs 500 in case of ELSS funds), which allows investors with even limited monthly surpluses to benefit from investing in equities.

Regular and automated investments also ensure rupee cost averaging by buying you more units at lower NAVs during falling markets. This helps in averaging the investment cost and eliminates the need to monitor the market and time the investments.

3. Top up your SIPs during market corrections

Steep market corrections like the one triggered by the COVID pandemic during the months of March and April this year lead many investors to stop their SIPs fearing further market dips and losses. However, steep market corrections and bearish market phases present an excellent long term wealth creation opportunity. It allows fund managers to buy quality equities at extremely attractive valuations. Hence, equity fund investors should not only continue with their SIPs during such market phases to average their investment cost, they should also try to top up their SIPs with lump sum investments in a staggered manner to further average their investment cost. Doing so would enable them to create much bigger corpuses with much lower contribution before the completion of the time horizon of their financial goal.

4. Prefer direct plans over regular plans

Direct plans have lower expense ratios than their regular counterparts as the fund houses do not incur distribution expenses in case of direct plans. The savings in distribution expenses remain invested in the fund, which start generating returns on their own over a period of time due to power of compounding. All these factors lead direct plans to register higher returns than their regular counterparts. While the difference between the returns generated by direct and regular plans of the same scheme may seem trivial during the initial years, the difference would become significant over the long term due to the compounding effect.

For example, if an investor starts investing Rs 10,000 per month in a regular plan of an equity mutual fund having an expense of 2%, his investment corpus would grow to about Rs 73.41 lakh after 20 years assuming an annualised return of 12%. However, if the investor instead invests in the direct plan of the same fund having an expense ratio of 1% for the same time horizon, his corpus would grow to about Rs 84.25 lakh. The difference in the corpus would be about Rs 10.84 lakh, a whopping outperformance of 13% by the direct plan. Hence, always opt for direct plans while investing in mutual funds to generate much bigger corpus over the long term.

5. Review your fund performance periodically

Periodical review of your mutual funds at regular intervals is as important as regular investing in mutual funds. Doing so will allow you to track your funds’ performances in the different market conditions vis a vis its peer funds and benchmark indices. Remember that even star funds with outstanding returns in the past can become laggards in the future for the long term. Hence, ensure to compare the funds’ returns over the past 1 year period with their peer funds and benchmark indices at least once each year. If your existing funds constantly underperform their peer funds and benchmark constantly for the past 3 years, consider redeeming them for better performing funds.

(The author is Director, Paisabazaar.com)

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