How to Handle Your Mutual Funds in 2021?

Do you want to diversify your portfolio? Are you looking for a professionally managed investment? You could invest in mutual funds to achieve your financial goals. According to the mutual fund’s investment objectives, it pools money from multiple investors to purchase securities such as stocks, bonds, money market instruments, or similar assets. The fund manager implements the mutual fund’s investment strategy and manages its portfolio. You may invest in mutual funds only if it matches your investment objectives and risk tolerance. Let’s understand how to handle mutual funds in 2021 to maximise your return. 

How to choose the best mutual fund?

You may consider picking the right mutual fund depending on your financial goals, risk appetite, and investment horizon. You must study the mutual fund portfolio carefully before investing your money. For example, you may avoid mutual funds that invest most of the assets in mid-cap and small-cap stocks if you are a conservative investor.

You may consider debt funds to be a safe investment. However, you must take a look at the rating of bonds in the debt fund portfolio. For example, a debt fund with a higher allocation towards AAA-rated bonds is safer than a debt fund with bonds of a lower rating. You must also check the duration of the bonds in the portfolio of the debt fund. A bond with a higher duration is vulnerable to interest-rate risk. 

You could study the mutual fund house’s track record before investing in mutual funds. However, you must choose the mutual fund only if you are comfortable with the fund manager’s investment style. Pick a mutual fund with a lower expense ratio which is the cost of managing your mutual fund scheme. A mutual fund with a higher expense ratio would eat up your profits. 

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How to Handle Your Mutual Funds in 2021?

Stagger your equity investments

The BSE Sensex hit a low of 25,981 points on March 23, 2020. It has since rebounded to reach over 49,000 points as of January 12, 2021. These statistics show you how difficult it is to time the stock market.

You could invest in equity funds through the systematic investment plan or the SIP. It is a way of investing a fixed amount, regularly in a mutual fund scheme of your choice. You may invest as low as Rs 500 per instalment in an equity fund through the SIP route. However, you may continue your SIPs even when the Sensex is rising and focus on your long-term financial goals. 

Diversify your portfolio

You may diversify your portfolio with equity and debt mutual fund schemes. Debt funds protect your portfolio against volatility in the stock market. You may consider investing in International funds for geographical diversification. 

However, it would help if you studied the portfolio of mutual funds. You may avoid investing in equity funds that put money in mid-cap and small-cap stocks if it doesn’t match your risk tolerance. 

You must take a look at the rating of bonds in the portfolio of debt funds. Invest in debt funds with AAA-rated bonds in the portfolio as compared to bonds of a lower rating. You may allocate 5%-10% of your portfolio towards gold. However, you may invest in Gold ETFs and gold funds through the SIP, instead of putting money in physical gold. 

Check your investment horizon.

You must select mutual fund schemes based on your investment horizon. It is the period for which you may hold the investment to achieve your financial goals. For example, you may pick debt funds to achieve your short-term financial goals. 

You must select debt funds where the duration of the bonds in the portfolio matches your investment horizon. You may invest in equity funds to achieve long-term financial goals, such as buying a house. 

You may review your mutual fund portfolio to check if it matches your investment objectives and risk tolerance. You could rebalance your portfolio in 2021 if your asset allocation has changed by more than 5%. You may consider rebalancing your mutual fund portfolio at least once a year. In a nutshell, you must adequately handle your mutual funds in 2021 to maximise your return. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in