MF Goal Planning

Mutual Fund Sahi Hai!
Bhupender Singh, CEO & Founder, Investment Planet

More and more investors are coming to invest in mutual funds after listening to or reading this punch line, but there is also a dilemma in the minds of investors whether to start investing without thinking about the returns in the short term or to look for profits in the long term.

We give below some tips on how to maximise returns from the mutual fund portfolio: -

Asset allocation-Diversify your investments
It is advisable that investors should understand what category of scheme they are investing in and what is the scheme's objective? Investors must diversify across various scheme categories and scheme asset classes, like debt, equity or gold funds, etc. This helps to create a hedge against uncertainties and also benefit from the returns of different asset classes.

Understanding risk and financial goals
Investors should consider their ability to take risk to get potentially high returns from their investments. They should also understand the potential risk of loss of the principal amount invested in mutual funds due to market volatility. People who are younger will be able to handle a higher level of risk and they can earn potentially higher returns by focusing almost exclusively on equity investments.

Lump sum or SIP?
There are two styles of investing: lump sum investing and SIPs. Seasoned investors who understand equity markets or those with very long-term investment horizon may opt for lump sum investments, while new investors or those who have investible surplus every month after meeting necessary expenses can ideally invest through SIPs. Even though these styles are disparate, they have their unique benefits, if done correctly.

Keep lump sum investments in debt schemes
In order to make lump sum investments, you need to keep quite a bit of money handy. However, if you keep large sums of money in your savings account earning 4%, that would probably not generate much in terms of returns. Instead, consider parking your excess money in ultra-short-term funds or liquid funds which offer superior returns as compared to savings bank account and have near zero risk.

Periodically review of portfolio & returns
It is important for an investor to understand that building a robust diversified investment portfolio is not a one-time activity and an investor should ensure the viability of the chosen investments over time. Therefore, a periodic check, say annually, should be done by an investor to know the returns of the existing investments. Many options, including reducing your exposure to certain investments, can be considered when one or more of your existing investments are not performing as per expectations.

Be careful about sectoral or thematic mutual funds
The mutual fund schemes that invest in a specific theme or a sector of the economy are known as thematic or sector-specific mutual funds. An investor will be able to get substantial returns from these funds when the specific sector is booming. However, special care should be taken considering the cyclic nature of these funds, since the boom phase of a sector may be followed by a dull phase, which can last for many years.

We advise to either stay away from sectoral and thematic funds if an investor's risk taking appetite is not very high or allocate only a small portion (maybe 10-15%) of the total portfolio into these funds.

Consider NFOs selectively
Investors mostly get attracted towards NFO because of their lower NAV, which is seen as the main selling point for NFOs. Since a fund that has no track record cannot have a low or high NAV, there is in fact no criterion for making the comparison. Investors should, therefore, evaluate the NFOs from different perspective before investing.

Conclusion
Nobody can predict the market direction. However, mutual funds provide a harbour to your hard-earned money. Investors can accomplish their goals of earning high-yielding returns on their investments by opting for a disciplined investment approach suiting their respective risk profiles. People should understand that mutual fund investments are market-linked and there is no certainty when it comes to markets. However, by making adequate efforts to implement the above suggestions and staying invested for the long term, an investor will be better placed to maximize the returns from mutual funds when compared to investors who are investing just because investing in mutual funds is the 'in-thing' these days!

The writer is a CEO & Founder, Investment Planet
Website: www.investmentplanet.in