Make The Most Of Mutual Funds

Make The Most Of Mutual Funds

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd

Mutual funds (MFs) are fast emerging as a preferred investment option for investors in our country. Considering that mutual funds are a diversified, transparent, flexible, tax-efficient and wellregulated investment option, investors can rely on them to ensure that they have enough money at every stage of their life. However, this can happen only if they understand the different aspects of mutual fund investing and follow the right process for investing in them. Making common mistakes while investing in MFs can cost investors dearly as it can result in taking higher risk or earning lower returns as well as compromising some of their important investment goals. Here is what you need to do to realise the full potential of what mutual funds have to offer.

Prioritise Asset Allocation
While mutual funds allow you to build a portfolio comprising different asset classes through a variety of funds, investing haphazardly without ascertaining the right mix of asset classes in the portfolio can make your investment process ineffective. Remember, a random approach either makes your portfolio very aggressive, thus taking you beyond your accepted level of risk, or very conservative, resulting in negative real rate of return. In reality, asset allocation is important as it determines the level of risk in your portfolio and what can be expected in terms of returns. Therefore, you must begin your investment process by ascertaining an ideal asset allocation and fund selection should be the last step since it helps you realise the potential of the chosen asset classes over your defined time horizon.

Avoid Fund Crowding in Portfolio
It is quite common to see investors owning a number of funds thinking that this would provide them a higher level of diversification and protection from risks. In reality, having an over-diversified portfolio makes it difficult to track the performance of funds and invariably non-performing funds pull down the overall portfolio return. Therefore, you must build a compact portfolio consisting of a few well-selected funds for each of your investment goals.

Invest in Hybrid Funds A variety of hybrid
funds are a great option if you may like to have varying degree of exposure to equity for growth along with debt to provide some stability. Hybrid funds usually can be a great option for investment goals to be achieved over the medium term. These funds also offer regular dividend i.e. monthly, quarterly and yearly. Considering that dividend is taxed at one’s applicable tax rate, opting for growth option and then enrolling for a systematic withdrawal plan (SWP) to generate regular income will be a smart option if you are liable to pay taxes at higher rates. Therefore, combine these funds in the right proportion with other options depending on your risk-taking ability and income requirement.

Keep Past Performance at Length
Past performance is an important criterion in the fund selection process. However, relying on short-term performance alone can backfire and cause disappointment as top performing funds keep changing every quarter. Therefore, you must look beyond performance and consider factors like suitability in terms of risk profile and time horizon and opt for funds that have a consistent performance track record.

Align SIPs to Goals
Investing in a disciplined manner through a systematic investment plan (SIP) is a powerful mechanism as it allows you to invest regularly and turn market volatility to your advantage through averaging. However, investing through SIP without having a defined time horizon can make it difficult for you to tackle volatility in the market. Aligning investments through SIP to your goals will keep you focused through your defined time horizon. For example, you will find it hard to stop SIP if it is aligned to your child’s education or your retirement planning or both.

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