The previous year, 2017 has definitely been a watershed period for India’s mutual fund industry. The inflows have been increasing steadily since the start of the year leading to creation of new records for the industry which might not be easy to break in 2018. However, as more and more investors enter into this new world of market-linked investments, one question on almost every investor’s mind is –The following are some handy tips to help you out.
A SEBI directive late last year pointed out a major concern about the Indian mutual fund industry that had been voiced by experts for years – there were just too many similar schemes and some of these needed to be merged or discontinued. It is not unusual for many top performing schemes to be invested in the same equity or debt instruments. Thus when these investments do well, your overall portfolio will grow faster, however, when the market takes a turn for the worse, your portfolio valuation will plummet. By diversifying across various investment categories namely equities, debt, money markets, gold, etc.you are in effect creating a hedge against uncertainties. However do maintain a cap on the number of investments you are holding during a given period as over diversification would in the long term adversely impact your returns.
The advent of e-KYC by verification of Aadhaar card has made it much simpler for investors from every walk of life. However to get potentially high returns from your investments, you have to consider the level of risk you are willing to take. This risk includes but is not limited to loss of the principal amount invested into the scheme. If you are younger, you might be able to handle a higher level of risk than when you are older hence you could earn potentially high returns by focusing almost exclusively on equity investments. However as you grow older and your responsibilities increase, which means that you need to maintain a greater amount of liquidity which can be achieved by increasing debt/money market – linked investments. The other factors to consider here are your financial goals and the reason why you are investing. If you are investing for retirement, large cap funds might be ideal; in case of tax savings, ELSS funds are the obvious choice and so on.
There are two typical styles of investing – lump sum investing and systematic investment plans (SIP).While lump sum investments are suitable for seasoned investors who can time markets, systematic plans are considered ideal for investors who are new to these investments.However, both of these seemingly disparate styles do have their unique benefits, if done correctly. The strategy of lump sum investments allows investors to purchase units at low prices by timing purchases when markets are low - this increases the likelihood of getting the investments redeemed for a profit at a later date. Alternately SIP or systematic investment plans help investors make their investments in a regular manner without having to wait for a specific time to enter into the market. Additionally, SIP investors receive the benefits of compounding and rupee cost averaging. In order to maximise your returns, it might be a good idea to not stick to a specific style of investment – invest in lump sum when markets hit lows and also invest systematically through the year. The allocation into different styles as well as considerations regarding how much you will be investing through each route, etc. would be based on your unique investment requirements.
In order to make lump sum investments, you need to keep quite a bit of money handy as the larger the amount invested in one go, the better. However, if you keep large sums of money in your savings account earning 3.5% to 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 accounts and feature near zero risk.You can also make systematic investments into other schemes by systematically redeeming your existing debt investments – this process is termed as STP or systematic transfer plan. This technique ensures that overall you are in a better position to receive higher returns on your investments as compared to others entering into the exact same schemes.
Building a robust diversified portfolio is not a one time activity as you have to ensure the viability of your chosen investments over time. This is where, periodically checking returns of your existing investments is important. In case one or more of your existing investments are not performing as per expectations, you should consider reducing your exposure to such investments. There is of course an alternate school of thought regarding this. Some analysts claim that in case of equities, temporary issues with respect to returns get sorted in the long term as long as you do not panic and redeem your investments hurriedly. This is of course a judgment call and the advice would vary from one investor to another as well as from one mutual fund to another. For new investors, making this sort of judgment might be tough and therefore in such cases, the services of a financial advisor would be vital for making the correct call. By determining which investments work best for you, you will be in a better position to maximise the returns from mutual fund investments.
Thematic or sector-specific funds invest in a specific theme or a sector of the economy. When the specific sector is booming, these funds can provide substantial returns. However, most sectors are cyclic in nature and thus the boom phase of a sector is inevitably followed by a bust phase and each of these phases can last for years. A number of new investors get into thematic or sector-specific funds during their boom phases as the returns data would show high returns in the short term and in some cases even in the medium term. Thus they end up investing in these funds when their prices are high – which is the starting point for a disastrous recipe with respect to future returns. Subsequently, when the bust phase of the sector starts, new investors panic as they watch their investment get eroded and end up redeeming their units for either low profits or at a loss. So unless you have clear and in depth understanding of a specific theme or sector, it is definitely better to stay away from sectoral and thematic funds. Go for a diversified equity fund instead.
New Fund Offers or NFOs are all the rage these days, however, they might not be the best investment option for investors and there are quite a few reasons why. For starters, a NFO represents a new fund which has no prior investments and no track record whether successful or otherwise. As a result the risk is higher for the investor because there is no benchmark to determine what course this fund’s performance would take in the future. What’s more many NFOs are closed-end funds that do not allow you to make redemptions no matter what their performance during the locked-in period. The main selling point for NFOs has been their low NAV. Unfortunately a fund that has no track record cannot have a low or high NAV as there is in fact no criterion for making the comparison. Therefore it is best to stay away from NFOs unless they provide you a unique opportunity that you cannot get from an established investment.
The above tips are definitely not foolproof formula for maximizing your investment returns. That’s at least in part because mutual fund investments are market-linked and when it comes to markets, there is no certainty. However, as long as you are staying invested for the long term and making adequate efforts to implement the above rules, you will be better placed to maximise your mutual fund returns as compared to investors who are investing just because investing in mutual funds are the “in” thing these days!