Maximize Returns On Your Mutual Fund Portfolio

Hemant Rustagi
CEO, Wiseinvest Advisors

Mutual funds are emerging as a simple and effective medium to create wealth for investors.  However, although an increasing number of investors are making mutual funds an integral part of their portfolio, retail participation continues to be very low. One of the reasons for this lack of interest on the part of individual investors is that there is not enough understanding about mutual funds. While a lot has been done by all the concerned stakeholders such as the mutual fund industry, distributors of mutual fund products and associations of mutual funds to increase participation, a lot still needs to be done in this direction. 

Needless to say, investors themselves have to put in efforts to understand the nuances of investing in mutual funds and follow the right process for funds’ selection as well as monitoring their progress. Mutual fund investors in our country have had mixed experiences. There are investors who have suffered on account of mismatch between reality and expectations in terms of returns, lack of understanding about various products and their suitability, and wrong positioning of mutual fund products. On the other hand, there are those investors who have been following a disciplined approach and have benefited immensely from their investments over the years. If you are a mutual fund investor or looking to invest in them now, here is what you need to do. 

Participate in the decision-making process. While taking help of a professional advisor can be of immense help, it is equally important for you to participate actively in the decision-making process. Remember, no one will know about your objectives, needs and risk profile better than you. While an advisor can help you in terms of determining the course of action and selection of funds, you have a big role to play in defining the parameters. 

Don’t try to time the market. There are many investors who believe that the best way to maximize returns from equity funds is through ‘market timing’- a strategy in which one tries to buy before the market goes up and sell before the market goes down. The fact, however, is that very few can predict market movements with any degree of accuracy. Remember, equity is the only option that has the potential to beat inflation over a period of time. Therefore, follow a disciplined approach of investing regularly to benefit from the true potential of equities as an asset class. 

Create a well-balanced portfolio. Considering that it is nearly impossible to predict short-term economic scenarios and their impact on the markets, you must design a well-balanced portfolio with investments in funds across various asset classes based on your time horizon and risk-taking capacity. It is equally important to keep a track of their performance to ensure that your portfolio remains matched to your investment goals.  

If you a first time investor, you must know that equity as an asset class is much more volatile than bonds. However, equities also provide a high probability of exceeding returns compared to other options over extended time periods. Hence, if you are a long-term investor, you must be concerned only about inflation risk and seek a return that creates real purchasing power of wealth. This can be achieved through a portfolio of quality, well-diversified equity funds. 

Rebalance your portfolio from time to time. When the markets are in a bullish phase, we often allow the portfolio to maximize our returns. While there is nothing wrong in trying to earn the best possible returns, the key to success in the long run is to keep an eye on the original mix of equity and debt in the portfolio. No doubt, equity market requires a long-term commitment; it is equally important to maintain the asset allocation suited for the assigned time horizon. In other words, rebalancing, either up or down, is a necessary ingredient for consistent investment success. Portfolio rebalancing is a process of bringing the different asset classes back into a proper relationship following a significant move in one or more. 

In fact, rebalancing is more about risk than return. It is equally important to decide on a time interval, like once a year, for this process. If the asset allocation shifts a little, there is no need to bother. If it shifts by say 10 per cent or more, you should rebalance. This can occur naturally over time or following an abrupt rise or decline in one or more asset classes.