These 8 steps will increase your mutual funds returns by 2x and cut down risk to half.

Mutual fund investing is relatively safer and better way to invest specially when you are cannot do your own research to pick quality stocks. Most of us in invest in mutual funds and expect a return of 12-15% however if we follow these simple steps, our returns from mutual funds will increase by 100% and risks will reduce by 50%.

1. Do not chase returns – Returns specially short term can be misleading. Every mutual fund has it’s own risk and return profile. In a bull market some mutual funds do well only to slide equally fast in a bear market. We all are looking for a good return on consistent basis so please understand risk and return aspect of mutual funds before making any conclusion. In case you find it too difficult then please do consider it’s long term return to say the least.

2. Risk allocation – Proper risk optimized portfolio ensures extremely limited downside and much superior return. Mutual fund have different classes – Equity, debt, hybrid, Income, Gold, gilt etc and each have different correlation with market movement. A perfectly risk allocated portfolio cancels the downside from one class with corresponding appreciation in other class thereby reducing your downside drastically. This one single technique makes your portfolio recession proof. We do optimization on our analytics tool available which does risk allocation with perfection as per your risk profile. However, if you find it too technical what at least you can do is to have some income, gilt and gold funds in your portfolio along with equity mutual fund.

3. Index fund – We hear a lot about index funds and the low cost involved with them. Unfortunately, it does not works out in a fast growing economy like india. In equity class around 20% of good funds beat the index fund by handsome margin. So it is worth going for good quality actively managed equity funds in place of index fund for better returns in short and long term. Also some equity mutual funds have higher expense ratios associated with them. Do not ignore a mutual fund just because the expense ratio is higher. We have done extensive research and found that if the fund manager has good stock picking skills he can easily neutralize all the loss due to high expense ratio and far exceed the returns.

4. Direct investment plans – Every mutual fund has a expense ratio which is hidden and charged directly from NAV. If you directly invest with the fund house you can substantially reduce it by 0.75% to 1.5%. Although this figure looks relatively small, but the impact is huge on 10 years basis. So never invest in regular plans and invest directly with the fund house to save on expense ratio. If managing so many portfolios is tough, you can try some online brokerage who allow investing in direct plans with some yearly fee.

5. Portfolio review – Mutual funds change colors. This may be due to change in fund manager, change in investment objective, merger and takeover etc. For example take 2 funds UTI opportunities fund and ICICI pru discovery fund. Both have performed far above average on 10 years basis however both are under performing since last 3 years and are at bottom. If you had switched at right time you returns would have been far greater. So, portfolio review is absolute must to generate great returns. Ignoring this will reduce your returns sharply. Do not switch just because the fund is under performing. Before switching from one mutual fund to another make sure it has under performed in atleast 2 market cycles vis a vis similar funds with same investment objective.

6. SIP vs VIP – SIP is perhaps simplest way to average out your risks while investing gradually a predefined amount at given intervals. VIP takes averaging to next level where we not only invest at regular intervals but the amount invested also fluctuates as per market conditions. In a falling market you will invest more and in a rising market you will invest less. There are tonnes of ways to do VIP but if done properly with right algorithm it can increase your returns by 4-5% every year and will beat SIP all the time.

7. Debt mutual funds – They under perform equity mutual funds in long term still we need to invest in them. Reason is to hedge your portfolio against market crash. So invest in debt mutual funds with this objective only. You must do some research and check the return trend of a debt mutual fund. Funds with a negative beta value vis a vis markets should only be selected. You also need to make sure that negative beta should be within limits else you may lose substantially in bull run. Debt funds without this characteristic will not solve any purpose. As a tip you can go for Dynamic bond, Income funds etc.

8. Large cap funds – I have been recommending throughout to select funds solely on the basis of their risk return parameter and their ability to contribute in building a perfectly risk optimized portfolio. Unfortunately, most large cap funds do not fit the bill. The amount of risk they reduce does not justify the returns they lag in bull run vis a vis mid and small cap funds.

If you follow the above-mentioned steps you can easily expect 25-30% returns on an average per annum with mutual funds with much lower risk. Please note this article is written keeping in view indian markets only. Some of the points may not be applicable for developed economy like USA where index funds beat 96% of actively managed funds. As always please do consult your investment advisor before taking any final decision. If you wish to avail our portfolio creation service write to us

Leave a Reply

Your email address will not be published. Required fields are marked *