Here's how you can boost your mutual fund returns

Over the last decade, mutual funds have achieved widespread appeal among regular investors. Why? Primarily because of the low-interest-rate environment that dominated most of the last decade and because of the strong returns delivered by mutual funds, both in debt and equities. However, there are a few tactics that can help retail investors get more out of their mutual fund investments. Let’s take a look:

Power of diversification

Fund managers’ investment decisions, asset classes invested in, and broader economic and market circumstances all impact fund results. Gold and equities, for example, have a negative association. During economic and geopolitical uncertainty, gold funds typically outperform equities funds.

In increasing interest regimes, short-term debt funds outperform long-term debt funds. Optimal exposure to multiple funds across fund houses and asset classes would assist provide optimal risk-adjusted returns based on an investor’s risk appetite and time horizon of financial goals. But avoid over-diversification or buying many funds with the same investment style and strategy.

 Advantage of SIPs

Systematic Investment Plans or SIPs allow you to invest a set amount in a mutual fund on a regular basis (weekly, monthly, quarterly). This is because the SIP amount is deducted automatically from your savings account on a predetermined date. Moreover, most equity funds have a minimum investment of Rs 1,000 (Rs 500 for equity-linked saving schemes funds), allowing investors with small monthly surpluses to benefit from investing in equities.

That said, investing through SIPs also ensures rupee cost averaging by buying more units at lower net asset values (NAVs) during bear markets. This also reduces the need to monitor the market and time the investments.

Boost SIPs during market downturns 

Sharp market corrections during the Covid-19 pandemic in March and April in 2020 caused many investors to redeem their SIPs, fearing more significant market losses. In fact, steep market corrections and negative market phases can be fantastic long-term wealth creation occasions.

It enables fund managers to buy quality stocks at incredibly low prices. Investors in equities funds should not only keep up with their SIPs throughout such market stages but also strive to stagger their lump-sum investments to further average their investing costs.

Consider direct plans 

Direct plans have lower expense ratios than conventional regular plans because fund houses do not have to incur distribution costs. These variable cause direct plans to outperform regular plans. While the difference in returns between direct and regular plans of the same scheme may appear minor in the early years, the compounding impact makes the difference significant over time.

So, when investing in mutual funds, always go for direct programmes to increase your long-term returns.

Monitor your fund’s performance

Regularly reviewing your mutual funds is as vital as regularly investing in mutual funds. This will allow you to compare your fund’s performance to other funds and benchmark indices. Remember that even star funds with stellar returns can become laggards over time. Hence, compare the funds’ 1-year returns with peer funds and benchmark indices at least once a year. You should consider redeeming your existing funds if they have consistently underperformed their peers and benchmark over the last three years.