Tips to Maximise Your Mutual Fund Investments

Mutual funds can be a great investment if you are looking to build wealth. If you are a beginner or don’t have the time to monitor the market regularly, investing in mutual funds is a convenient option. The investor’s portfolio is typically managed by a fund manager, who has a good understanding of the market. Portfolio management companies are regulated by SEBI, to protect the investor interest and market integrity.

If you have just begun your investment journey, this article will guide you on strategies on how you can get maximum returns on your mutual fund investments

What are Mutual Fund Investments?

Mutual funds are a popular option for individuals who want to invest in a diversified portfolio of assets, which mainly includes stocks, bonds, and other securities. A mutual fund is a type of trust that collects money from several investors who share a common investment objective. The money pooled in by a large number of investors is what makes up a Mutual Fund and the investments are managed by a fund manager. The fund is strategically invested in equities, bonds, money market instruments, and/or other securities. The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. One of the key benefits of mutual fund investment is diversification, which allows you to invest in a range of assets rather than a single stock or bond. For someone who is a beginner, mutual funds are an excellent option to get started as they are managed by professionals.

Risks with Mutual Fund Investments

Before one invests in mutual funds, it is important to understand the risks attached with mutual fund investments. 

No guaranteed returns in mutual fund schemes: Mutual fund investments are not guaranteed or assured return products.

Understanding Risk in Mutual Funds: There is investment risk attached to trading volumes, settlement risks, liquidity risk, and default risk including the possible loss of principle.

Market Fluctuations: The value of an investment in a mutual fund scheme changes as per fluctuations in the stock market.

Factors Influencing Mutual Fund NAV: Changes in interest rates, currency exchange rates, changes in Government policies, taxation, political, economic, or other developments, and increased volatility in the stock and bond markets also impact mutual fund investments.

Since mutual funds are broadly classified into equity mutual funds and debt mutual funds, let us understand the risks attached to both:

Risks with Equity Mutual Funds

Liquidity Risk: Equity mutual funds are restricted by trading volumes and settlement periods. If there is a decline in the value of securities held in the portfolio, it may lead to funds incurring loss until the security is sold.

Risks with Debt Mutual Funds

Interest Rate Risk: When interest rate rises, the price of existing fixed-income securities falls and vice versa. 

Credit Risk: In case of default, the scheme may not receive due amounts and the NAV (Net Assest Value) of the scheme may fall into the extent of default. The risk associated with defaults on corporate bonds carries a higher credit risk than government bonds. 

Advantages of Investing in Mutual Funds

Managed by Professional Fund Managers: Many investors may be beginners and may need to learn more about the market and where to invest. These professionals understand where to invest that reaps the maximum returns.

Liquidity: Mutual funds can be easily bought and sold, which gives them high liquidity. They can be redeemed quickly and the investor has easy access to funds.

Power of Compounding: Starting early with investments will reap benefits in the long run. Even with small and consistent investments, one can harness the full benefit of compounding and build a decent corpus for the future.

Define Investment Goal and Risk Appetite: It is imperative to define financial goals related to the investment and evaluate one’s risk-taking capacity. For example, if the goal is to establish a steady source of income with moderate risk, one may consider debt-oriented mutual funds. If the investment goal is to retire early and one has a high-risk appetite, one should consider investing in equity-oriented mutual funds.

Disadvantages of Investing in Mutual Funds

Exit Cost: Several mutual funds in India like ELSS (Equity Linked Savings Schemes) have an exit cost associated with them. If one exists before the stipulated time, they have to incur exit charges.

Lock-in period: Mutual fund investors cannot withdraw money before the specified time. Thus, in case of emergency, one cannot liquidate their invested amount.

Fluctuating Returns: Mutual fund returns keep changes in value as per market fluctuations. This factor is important to keep in check before one invests in a mutual fund.

Low Cost: Mutual funds in India are mostly low costs. The fund management fees charged by mutual funds are 1%-2.50%. Depending on the invested mutual fund, they provide you with higher returns.

Tax Benefits: Under Section 80C of the Income Tax Act, investments made in mutual funds in India via the equity market offer tax benefits, up to Rs. 1.5 lakhs. 

Tips to Maximise Your Mutual Fund Investments

Before starting with investments, it is important to clearly define the goal of investments and the level of risks one can take. Once done, here are a few tips to consider when going ahead with mutual fund investments: 

Regular Investments (SIP): If the investment goal is wealth creation for the long term, a good option is to start a Systematic Investment Plan (SIP). SIP is a system where you invest a fixed amount in a mutual fund consistently. Since the investment is long-term, it benefits from rupee cost-averaging. Rupee cost averaging lowers the average cost of investment and improves returns.

Portfolio Diversification: Investing in diverse types of mutual funds balances out the risk factor. Maintaining a mix of equity, debt, and other mutual fund., optimizes returns and maintains portfolio stability. 

Monitoring and Reviewing Portfolio: All mutual funds don’t perform the same in a given market condition. It is important to regularly review the performance of your investments and make adjustments, on those basis. 

Also Read: Things to Know About Loans Against Mutual Funds

Conclusion

Investing in mutual funds can seem overwhelming if one is a beginner. However, one can start slow and equip themselves to understand the financial schemes available. Investing in mutual funds is a good option to build wealth. One must consider their financial goals and risk appetite when investing in a mutual fund. The tips mentioned in the article will aid you to maximise your returns, as per your financial goals.