Are you investing in mutual funds for good returns? Do you find it tough to pick the best performing mutual funds? You may consider these five tips to invest in mutual funds and earn attractive returns. Mutual funds collect money from investors with similar financial goals. It puts your money in a portfolio of assets with a defined investment objective. You may find mutual funds gaining popularity in recent years.
Let us take a look at five tips to invest in mutual funds for good returns.
1. Understand different types of mutual fund schemes
Mutual funds may invest in equity and equity-related instruments, fixed income securities, or a mix of both. You may find several types of equity mutual funds such as sector funds, index funds, or tax saving funds. You could find sector-specific funds picking up stocks of a particular industry or sector. Index funds would imitate the portfolio of an index such as BSE Sensex or Nifty 50 to offer matching returns.
Debt funds may invest your money in money market instruments such as treasury bills, commercial paper, and certificates of deposit. It may put money in long-term government securities that offer a higher return as compared to low-risk instruments. However, it is susceptible to changes in interest rates over some period of time. You may also find debt funds investing in lower-rated securities to offer you a higher return. Balanced funds divide your investment between equity and fixed-income securities.
You may consider picking mutual fund schemes that match your investment objectives and risk tolerance. You could study the mutual fund schemes and the investment style of the fund manager. It helps you understand if the fund may achieve your financial goals.
2. Diversify your portfolio
You may find the return from mutual funds differ as they put your money in different asset classes and fund categories. For example, gold as an asset class has a negative correlation with stocks. You may find gold prices rising when the stock markets crash.
You could diversify your portfolio with gold funds to protect it from the volatility of the stock market. You could diversify your portfolio with investments in fixed income securities. It would be wise for you to diversify your portfolio across asset classes and fund houses to achieve an optimum risk-adjusted return.
3. Invest in mutual funds through the SIP route
You may consider investing in equity funds through the SIP or the systematic investment plan. It is a method of staggering investment in the mutual fund scheme over some time. You could invest as low as Rs 500 per instalment in the mutual fund scheme of your choice.
You would find the SIP amount debited automatically from your bank account on a predetermined date. It helps you to save money in a disciplined way and achieve your financial goals.
You may consider investing in the equity fund through the SIP to get the benefit of rupee cost averaging. You could invest fixed amounts regularly in the mutual fund. It helps you buy more units of the fund when the stock markets are low and less when they are high. It helps you average the investment cost and avoid timing the market.
4. Opt for direct plans over regular plans
You could invest in direct plans of mutual fund schemes as compared to regular plans. You could invest directly with the asset management company through the direct plan. It has a lower expense ratio as compared to a regular plan, as the fund house doesn’t incur distribution expenses.
You may get a higher return by investing in direct plans through the asset management company, even though the portfolio remains the same. The lower expense ratio of the direct fund translates to a higher return over the long-run.
5. Review your mutual fund portfolio
You may consider reviewing the performance of your mutual funds at regular intervals of time. You could compare the return of the mutual fund schemes over different market conditions against a benchmark and peer funds. Replace mutual funds that consistently underperform the benchmark over a long period of time.
You may select mutual fund schemes depending on your investment objectives and risk appetite. You may consider reviewing your equity schemes at least once in six months. Check the track record of the fund house, the expense ratio of the scheme, and the investment style of the fund manager before selecting the mutual fund. You may also consider the tax implications of your investment. In a nutshell, you must diversify your portfolio for better risk-adjusted returns.
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