When it comes to investing in mutual funds, there is one thing, in particular, every investor expects from their investments — good returns. Considering the various types of mutual funds and hundreds of schemes in the market today, choosing the right mutual fund plans can be quite hectic for a first-time investor. Here are a few tips which when implemented can help you earn excellent returns from your mutual fund investments:
1. Set Your Financial Goals
Having a clear investment objective is one of the most crucial strategies when investing in mutual funds. Different investors have different purposes or goals for their investments. It could be to save on taxes, funding of children’s education, to purchase a house, retirement planning or even that much need vacation.
Defining your financial goals – long-term or short-term – can help prospective investors choose the right investment plan depending on their time-horizon and risk-appetite.
2. Assess Your Risk Appetite
When it comes to investing in mutual funds, there are a plethora of investment plans to choose from. These plans vary depending on the various investor requirements. Also, the plans can be characterised by their inherent risk. Though mutual funds with high risk have the potential to generate better returns when compared to moderate-risk funds, it comes at a price.
In some cases, investing in high-risk inherent mutual funds can also lead to sooner redemptions. This could result in lower returns or even losses in the worst-case scenario. Hence, it is imperative that you consider your risk appetite before investing in mutual funds.
3. Diversification is the Key
An ideal portfolio is one where the investments are diversified across various types of funds. Relying on one particular mutual fund can sometimes lead to the lower returns if the fund underperforms in the event where the specific market starts falling.
In such cases, investors can consider diversifying the investment portfolio by investing in different types of mutual funds. This will ensure that the well-performing funds balance the overall returns generated if any one of the funds starts underperforming.
Also Read: 7 Steps to Create a Sound Financial Plan for the Year
4. Choose a SIP Over Lump Sum Investment
The investment sector in India is witnessing a significant increase in inflows towards investments in mutual funds. Why? It is because of the Systematic Investment Plan (SIP). SIP allows investors to invest as low as Rs 500 every month in mutual funds of their choice. Investing through a SIP enables investors to invest in more mutual fund plans at a time. Also, SIP offers investors the benefit of rupee-cost averaging along with compounding.
5. Opt for Funds With Lower Expense Ratio
Overlooking the Expense Ratio is one of the most common mistakes investors tend to do when investing. Expense ratio can be defined as the annual fee that investors are required to pay the mutual fund houses for managing the fund.
The returns your mutual fund generates is inversely proportional to the fund’s expense ratio. The higher the expense ratio is, the lower returns you will earn. Hence, it is advised to look into the mutual fund’s expense ratio before you start investing.
6. Track the Fund’s Performance
Investing in mutual funds and continuing your investments alone does not guarantee good returns. Since mutual funds are subject to market risks, it is advised to track the performance of your investments regularly. Once you have given the investments considerable time to grow, analyse the funds’ return and adjust your investment portfolio in case any of the funds are performing below par.
7. Do Not Hesitate to Take Financial Advice If Required
Choosing the right mutual fund plan and investing in it can be quite tricky for the first-time investor. In some cases, individuals also tend to go with their instincts rather than analysing the funds. While trusting your instincts might sometimes do the job, seeking assistance from financial advisors can go a long way. Also, financial advisors have the expertise required in mutual fund analysis. Consulting an advisor for your investments will ensure that you earn better returns.
For any clarifications/feedback on the topic, please contact the writer at viswanathan.v@cleartax.in
Abbreviation is the name of the game – SIP, NPS, ELSS, KTM, and OMR.
Vishnu is the cat that got too curious. He can normally be found staring at market charts or drooling over his Real Madrid curios.
Favourite quote: ” Madrid, Madrid, Madrid ¡Hala Madrid! Y nada más”
