How do you ensure maximum returns from your mutual fund investments?

Look at the recent June 2023 data shared by the Association of Mutual Funds in India (AMFI) and you will realise the huge influx of funds to the tune of ₹44,39,187 crores into various mutual fund investments. More people are gradually putting their money into mutual funds, thus, enabling retail investors to own major shares in business houses even without directly dabbling in stocks. 

However, not all investors earn equal returns. Many complain about their choice of mutual funds as they review and compare various fund performance results and realise how and where they went wrong while investing their money. This holds particularly true for novice investors who feel perplexed and uncertain about how to proceed with their investments. Selecting the appropriate schemes is crucial in order to attain the anticipated returns.

So, how does one ensure maximum returns from mutual fund investments? The answer is simple. Look at essential factors that will allow one to decide which mutual funds to invest in and how to modify one’s mutual fund portfolio to benefit from high yields in the long run. Some of these include:

Focus on the risk-to-reward ratio

You cannot experience gain without pain. Anticipating high rewards without incurring the necessary risk is futile. Many investors are just not willing to take the desired risk though they yearn for high returns that not only beat the existing inflation rate but also help them create wealth.

Prior to making investments in mutual funds, it is important to evaluate your risk tolerance and investment return expectations. Based on these factors, choose a mutual fund scheme that aligns with your identified financial goals. Take, for example, how newly employed people take the risk of plunging downright into small-cap funds that are largely volatile and yield considerably high returns.

The following table illustrates how small systematic investment plans (SIPs) into small-cap funds help to accumulate a good corpus when invested for a prolonged tenure, say 10-20 years.

Midcap funds have been performing exceptionally well in the past few years. Many small-cap stocks have been elevated to the position of mid-cap stocks, thus, explaining the quality of stocks now included in mid-cap mutual funds.

The risk factor may not be equal in all, thus, explaining why investments in small-cap and mid-cap funds may not help. A bit of risk-taking will help, which is why putting your money into flexi-cap funds that combine both risk and stability makes sense.

By following this approach, you can select a mutual fund scheme that has the potential to provide you with higher returns based on your risk tolerance. This will assist you in building the desired corpus over a period of 10-20 years to accomplish your financial objective. Assessing your risk appetite will enable you to determine the necessary investment amount in a mutual fund scheme to reach a specific financial goal.

Investments must be diversified enough

Remember the age-old adage, “Never put all your eggs in one basket”. The archaic saying holds true when it comes to deciding your investments too. True, wealth is important but you cannot ignore stability at the cost of financial success. All have different financial goals and to some people, responsibilities precede their intent to create a secure financial future.

One thing, you cannot afford to invest your entire money into mutual fund investments. Secondly, you must not limit your investments to one or two mutual funds only. It is advisable to achieve an ideal investment portfolio by diversifying your investments across various mutual fund schemes and different mutual fund companies. Also, many of you may not realise that being a bit conservative in your finances is actually profitable and good for your financial health.

This implies having an investment portfolio having a decent proportion of mutual fund investments with varying risks and returns over a period. This means choosing mutual fund schemes that include large-cap funds, mid-cap funds, hybrid funds, one or two decently performing small-cap funds, and debt funds.

Over diversification, however, can spell trouble as it splits your income into various investment opportunities, thus, not allowing you to benefit much from any. Having a well-diversified portfolio can greatly decrease the risk associated with your investments. However, it is important to avoid excessive diversification, as it can potentially diminish your portfolio returns. Strive to diversify your portfolio to a level where the overall risk aligns with your risk tolerance, while still maintaining the expected returns on your investments.

Selecting the right mutual fund scheme

There are many mutual fund companies, each offering many schemes. Not all mutual fund schemes may be worth your attention. Also, you need not put your money in all kinds of mutual funds that you hear about on social media platforms. Following the herd into putting money into new fund offers (NFOs) will definitely not help garner the much-desired wealth.

So, how do you decide the best scheme to invest your money in? Before investing in any mutual fund scheme, you must check its past performance, management efficiency, and expense ratio. Consistency matters when it comes to comparing returns from investments. It will do a lot of good if you compare the schemes online to identify the ones that have the potential to offer you a consistent return. Always prefer direct plans over regular ones as they have a lower expense ratio.

Choosing how to invest your money

If your intention is to invest a lump sum amount with a lower risk profile, opting for an appropriate debt fund can be a favourable choice. However, if you are willing to accept a moderate level of risk in exchange for better returns, consider investing in a balanced fund. On the other hand, if you seek higher returns and are prepared to take on higher risks, investing in a large-cap equity fund may be suitable.

To mitigate risk and optimise returns, it is advisable to diversify your investments across various schemes and different mutual fund companies. Additionally, for further risk reduction, you can allocate your lump sum funds to a liquid fund and utilise the Systematic Transfer Plan (STP) option to invest the money in a staggered manner into an appropriate mutual fund scheme.

If your goal involves building a corpus over the long term through regular installments, consider investing via a SIP scheme into an equity fund that aligns with your risk tolerance. Investing through SIPs can help generate attractive returns, especially when investing for the long term amid market volatility.

Rebalance your portfolio regularly

You cannot afford to invest your money and then forget to check your investments altogether. Regular rebalancing is important, but this does not imply that you alter your portfolio too frequently. While it is important to periodically review your portfolio and assess the performance of your investments, it is crucial to avoid constantly switching between investments solely based on news and opinions from financial influencers.

Hiren Thakkar, Chartered Accountant Proprietor, Hiren S Thakkar & Associates said, “There is no standard formula to rebalance the portfolio but once in a year an investor must look at his or her asset allocation and do changes if necessary. Whether to rebalance or not (shifting from equities to debt or gold or vice-versa) is purely a decision based on personal risk tolerance and capacity.”

At times, your chosen mutual fund investments may underperform or exceed your expectations. In the event that it falls short of your expectations, you might consider switching investments from underperforming funds to more promising ones. Conversely, if your portfolio has significantly surpassed your expectations, it may be prudent to rebalance your portfolio by transferring investments from high-risk schemes to low-risk mutual fund schemes in order to secure the returns already achieved.

Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) added, “Generally, the investors should rebalance their portfolios at least once a year. But with the markets delivering great returns in the recent past, it might be a good time now to rebalance your portfolios once again to bring in a sanity check. Rebalanced portfolios are known to deliver better risk-adjusted optimal returns in the long run.

If your goal was a short-term goal with a small equity component, then the recent run-up gives you a good opportunity to book and lock profits and reduce the equity component of your short-term portfolio even further. On the other hand, if your goal was a long-term goal, then the run-up would have skewed your portfolio towards equity and may have rendered it unbalanced and exposed to unnecessary risk. So, you can do a rebalancing exercise to bring the portfolio back on track.”

“When doing rebalancing, it is also a good time to weed out the consistent non-performers and instruments which have a very low weightage from your portfolio. Rallies like these where everything is going up, give the rare opportunity to get out of the laggards of the portfolio at good prices. So might as well utilise it to clean up your portfolio too in the overarching theme of rebalancing,” added Ashish.

Mutual fund returns are not constant, which means that you must be watchful before you invest your money into them. Also, not all mutual funds will yield high returns always. This explains why we must look beyond just returns before deciding to put our money into any of them.