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Maximising Returns: How To Choose the Right Mutual Fund for Your Investment Goals

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Investing in mutual funds has become highly popular in India, with mutual fund assets nearing a staggering ₹60 trillion as of May 2024. In FY24, domestic mutual fund assets grew by 34%, the biggest increase in seven years. This surge indicates a growing awareness among Indian investors about the benefits of mutual funds. However, you must choose your mutual funds wisely to maximise returns.

Today, there are several mutual fund options to choose from. But which one can maximise your returns? What are the essential factors to consider while picking the right mutual fund for your investment goals? Here are the key considerations. 

Define Your Investment Goals

 

Start by clearly defining your investment goals. Ask yourself if you’re investing for any of these or other specific goals:

  

Short-term gains (you aim to earn profits in a shorter time span of less than 1 year),   

Long-term wealth accumulation (you focus on growing your money significantly in the long run by staying invested for more than 1 year)   

Retirement  

Child’s education, etc.   

 

There are different types of mutual fund schemes designed to meet various objectives such as capital appreciation, regular income, and liquidity.   

 

If you have a short-term goal in mind, Debt funds such as Ultra-Short Duration Funds, Short Duration Funds, or Overnight Funds, can be suitable. These funds have shorter maturity periods, typically ranging from overnight to a few days. Debt funds offer stable returns in the form of interest earnings and allow you to have quicker access to your money.  

 

For long-term goals, you can opt for a combination of equity and hybrid funds in your portfolio. Equity tends to be volatile in the short run. Staying invested in equities for a longer period can offer larger benefits.  

 

You may also have goals that require a combination of short and long-term approaches. For example, you can invest in a hybrid fund that offers both stability and growth. This way, you can save for your child’s school fees next year while also planning for their higher education in 10 years. This mixed approach balances your immediate and future financial needs.  

You can also consider diversifying your portfolio with a mix of debt, equity and hybrid funds to ensure a balanced risk-return profile, providing stability during market fluctuations while still aiming for substantial growth over time.  

Assess Your Risk Tolerance

 

The next step is to check your risk tolerance. Risk tolerance is nothing but your ability and willingness to endure market volatility and potential financial losses. The Securities and Exchange Board of India (SEBI) has made it easier to choose a fund per your risk tolerance. It has categorised mutual funds into 6 different buckets as per their risk levels:  

 

Low Risk: If you prefer safety and capital preservation, low-risk funds are for you. These funds invest in high-quality fixed-income securities, offering minimal risk.  

Low to Moderate Risk: These funds strike a balance between safety and moderate returns.  

Moderate Risk: The mutual funds that have moderate risk profile often blend equity and fixed-income investments in their portfolio. So these may fit your needs if you are comfortable to take on some level of risk.  

Moderately High Risk: If you’re willing to take on higher risk for the possibility of higher returns, these funds may be suitable. They usually have a greater allocation to equities.  

High Risk (Equity Funds): These funds are perfect for you if you can endure significant market volatility for potentially substantial long-term gains, primarily investing in equities.  

Very High Risk: If you have a high-risk appetite and are ready to face severe market fluctuations for the chance of very high returns, these funds are for you. They often include sector-specific or thematic equity funds.  

 

Each mutual fund scheme calculates its risk value based on specific parameters and displays it on a risk-o-meter, showing its risk level. You can refer to the risk-o-meter when choosing a mutual fund scheme to understand its risk level. Depending on your goals and risk comfort, you can create a balanced portfolio of mutual fund investments.

Examine Fund Performance

 

As they say, ‘Always learn from the past to plan for the future’. 

Before you invest in any mutual fund, look at how well it has done over the years. For instance, some of the top equity funds in India have given annual returns of over 15% in the last five years.

 

Also, consider a factor known as ‘risk-adjusted returns’. This tells you how much risk the fund took to get its returns. The Sharpe Ratio is a good measure for this, as it shows how much return you get for each unit of risk. 

 

A higher Sharpe Ratio means better performance for the risk taken. For example, a fund with a Sharpe Ratio of 1.5 is better than one with a ratio of 1. You can easily find a mutual fund scheme’s Sharpe ratio in the fund’s fact sheet, which can be accessed from the fund house’s website or the investment platform through which you invested.  

Cost of Investing in Mutual Funds

 

Investing in mutual funds involves several expenses that can impact your returns. The expense ratio is one such cost. It covers management and administrative fees that are charged by fund houses. As per SEBI guidelines, equity funds typically have an expense ratio of 1.05-2.25%, while debt funds are around 0.8-2%. Most experts would suggest going for a lower expense ratio because that would mean higher returns for you.   

Analyse Portfolio Composition

 

Understanding where your money is invested is crucial. Start by examining the key sectors where the fund is invested. For example, in 2024, most equity funds have significant holdings in the technology and financial services sectors. This sectoral allocation can influence the fund’s performance.

 

For debt funds, focus on the credit quality and maturity of the securities. Funds with higher exposure to AAA-rated securities are generally considered safer due to their lower default risk. Additionally, the maturity profile of the securities can impact the fund’s sensitivity to interest rate changes.

Check Fund Manager’s Track Record

 

A skilled fund manager can make a significant difference. Evaluating the fund manager’s track record involves looking at their experience, their investment philosophy, and their performance during different market cycles. Consistency in performance, especially during market downturns, is a good indicator of a capable fund manager.

Use SIPs

 

Systematic Investment Plans (SIPs) are a great way to mitigate risk and build wealth over time. With SIPs, you invest a fixed amount every month in a mutual fund of your choice. It allows you to buy some units every month. It helps create a financial discipline and lets your money grow steadily over time.  

 

According to AMFI data, investors using SIPs have averaged returns of 12-15% in equity funds over the last decade. SIPs allow you the benefit of rupee cost averaging, which basically means that you invest a fixed amount regularly regardless of market conditions. This approach brings down the impact of market volatility, because you buy more mutual fund units when prices are low and fewer units when prices are high. Over time, this can lead to a lower average cost per unit and potentially higher returns.

With the mutual fund market in India rapidly expanding and offering numerous options, choosing the right fund becomes essential. 


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