Maximise Returns From Mutual Funds

In today’s complex financial environment, it is a great challenge for investors to achieve their varied goals over different time periods. No wonder, many investors falter while investing their hard-earned money. On the one hand there are investors who still invest a significant part of their portfolio in traditional options like fixed deposit, bonds, debentures and small savings schemes; on the other hand there are those who have made market-linked products like mutual funds an integral part of their portfolio. However, the number of such investors is still very small.

It is ironical that despite being one of the most versatile investment options for investors with varied risk profile, time horizon, needs and goals, mutual funds have not been able earn their rightful place in their investment universe. In fact, even those who invest in mutual funds often make haphazard decisions that come in the way of getting the best possible results from their portfolios. While every investor hopes that all the funds in his portfolio should do well at all times, in reality the performance of some of them may slip for different reasons.

Apart from a natural phenomenon called volatility, the portfolio performance may also get adversely impacted by wrong selection of funds, ignoring non-performance, redeeming funds in a hurry, and following illogical strategies. Having a strategy for buying and selling can help you maximise your returns. Here’s what you need to do:

Invest in Quality Funds

Investors often make the mistake of investing in funds based on their short-term performance. More often than not, they end up investing in aggressive funds and hence expose themselves to much higher risk than they should. Therefore, the key is to invest in funds that have a quality portfolio and a consistent performance track record. This will help in not only overcoming most temporary setbacks, but also in ensuring the right balance in terms of exposure to different market segments, that is, large-cap, mid-cap and small-cap.

It is equally important to know that despite taking all precautions, you may still have to face erratic performance. Remember, if the fund falls in line with its benchmark index as well as its peer group, it should not be much cause for concern. Besides, a good quality portfolio always makes a comeback.

Balance Risks and Rewards

Tracking performance of the portfolio on a regular basis is an essential activity to ensure success. Ideally, to analyse performance, you must consider returns as well as the risk taken to achieve those returns. Therefore, the question that you need to address is how much risk did the fund manger subject you to, and did he give you adequate reward for taking that risk? If the portfolio composition of a fund takes you beyond your defined risk-taking capacity, don’t hesitate to get rid of such a fund.

Follow a Selling Strategy

While there is no set formula for determining the perfect time to sell a mutual fund investment or for that matter any investment, it pays to have a strategy in place to make selling decisions. Here are some of the guidelines:

• You may consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.

• You may consider exiting from a fund if its performance has seriously lagged its peers for a period of one year or so.

• You may consider selling a fund when it no longer meets your needs. If you select appropriate funds initially, this will only be the case if the fund changes its objective or investment style, or if your needs change.

• Avoid investing in a fund just before the dividend is paid.

Many funds will declare dividends between now and the end of the current financial year. Many investors believe that investing in a fund, just before the dividend payment, is a smart strategy. It is a myth and hence if you are one of those, think again. When you invest in a fund just before the dividend payment, you receive a part of your own capital back as dividend.  Besides, by keeping your focus on dividend, you may end up investing in a fund that doesn’t merit an investment. Remember, dividend payments is an on-going process of distributing gains to its unit-holders and only those who remain in the fund for a considerable period benefit from it in the real sense.

Therefore, to invest in a fund wherein the immediate dividend payment is the main attraction is not a smart strategy after all. The right way to invest is to carefully select funds based on the quality of portfolio, consistency in performance, as well as suitability of the fund as per your asset allocation.