The year 2025 has started with huge volatility in the Indian stock markets and the market returns seen post-COVID are a difficult dream. However, does that mean you should stay away from stock market investments? Absolutely not! Seasoned investors know that every dip in the market is an opportunity to invest in quality stocks or mutual funds. So how do you maximise your returns from mutual fund investments? Check out this blog to know some tips or strategies you can use to achieve this goal.
As per SEBI classification, mutual funds are classified under many categories. However, when it comes to investment approaches, mutual funds are classified into essentially two categories, i.e., Active Mutual Funds and Passive Mutual Funds.
Active mutual funds are funds where the fund managers are the driving force behind the fund investment strategies to meet the fund objective. Investors looking for funds that have the ability to beat market returns should focus on investing in active mutual funds. These funds may provide higher returns but also have correspondingly higher risk. Therefore, an essential factor influencing the investment decision in active mutual funds is the fund manager's expertise and experience to ensure that they can navigate the fund effectively during extreme market volatility. Examples of active mutual funds include equity mutual funds, debt mutual funds, hybrid mutual funds or liquid funds, etc.
Passive mutual funds track the performance of their benchmark index. Their returns are relatively lower than those of active mutual funds, as the aim is essentially to meet the index returns while minimising tracking errors. Thus, the role of fund managers is limited in such funds, and they do not actively participate in developing fund strategies to beat market returns. Examples of passive mutual funds include index funds and ETFs (Exchange Traded Funds).
What is the one thing that an average investor knows about mutual fund returns? The answer is the famous line, ‘Mutual funds returns are subject to market risk’. So what can you do to maximise your portfolio returns despite the market risks? Here are a few tips or strategies that investors can use to maximise their mutual fund returns,
One of the biggest hurdles an average investor faces in creating a corpus is the myth that you need to start with a substantial amount. This hurdle is solved through the SIP feature of mutual funds. SIPs (Systematic Investment Plans) are an investment option where investors can start mutual fund investments with amounts as low as Rs. 500. This allows investors across every segment of society to participate in stock market investments and accelerate wealth creation. SIP plans allow flexible investment in mutual funds and also the facility to stop/pause them at any point. Investing through SIPs also allows investors to leverage the power of compounding to the maximum and achieve the rupee cost of averaging in the long run.
The secret to wealth creation and maximising returns from mutual funds is to start as early as possible. This allows the investments to grow over the long term ensuring that investors meet their investment goals in due time. The growing awareness around mutual fund investments, especially among young investors, has changed the traditional perception around investments encouraging investors to start creating their investment portfolio as early as possible and keep adding to it regularly over time.
Another key to maximising returns is staying consistent with the mutual fund investments till you achieve the investment objectives. Some investors start liquidating their investments in the face of market volatility. However, market volatilities should be seen as a chance to rebalance investment portfolios and add quality funds that align better with the investment goals. This consistency of investment ensures a disciplined approach towards investing enabling investors to meet their investment goals in a systematic manner.
A unique feature of SIPs is the ability to increase the SIP amount from time to time. This feature, also known as the Step-up SIP, allows investors to increase their SIP based on the increased availability for investment or revised investment goals. This feature helps investors boost their wealth creation plans, benefit from increased returns, and the ability to meet investment goals with a faster timeline.
The expense ratio of mutual funds is the cost that the AMC charges the investors for managing their portfolio and paying for various expenses like fund manager fees, administration expenses, etc. The expense ratio is a direct hit to the mutual fund returns, hence, it is important for investors to understand this expense and evaluate similar funds on this parameter. Investing in direct funds can help investors save more on this expense as the expense ratio of direct funds is relatively lower than regular funds ultimately leading to higher returns in the long term.
Diversification is a key strategy to reduce risk and enhance returns. Instead of putting all your money in one type of fund or sector, it is better to spread your investments across different categories like equity, debt, and hybrid funds. Diversification can also be within sectors or geographies. Thus, if one sector or asset class performs poorly, gains in others can offset the losses, ensuring the overall portfolio remains stable.
The selection of the right fund to include in the investment portfolio is a tedious process and should not be taken lightly. Investors should select the right fund based on several factors like the fund’s historical performance, investment objective, risk level, expense ratio, etc. One of the prime factors in this process is alignment with individual investment goals. For example, equity mutual funds are ideal for long-term wealth creation or long-term goals like retirement. Similarly, debt mutual funds like liquid funds to short-term debt funds are suitable for short-term goals like building emergency funds while hybrid mutual funds are suitable for meeting medium-term goals like buying a car or funding children’s education.
A fund manager is like the steering force for mutual fund performance. Therefore, it is critical for investors to assess or research the fund managers' track record, experience, expertise and educational qualifications as well as investment philosophy. A mutual fund being managed by an experienced fund manager can navigate the volatile markets with relative ease while an inexperienced fund manager can lead the fund performance in a nosedive, eventually wiping out investor’s wealth.
Finally, regularly reviewing and rebalancing your portfolio is essential to keep it aligned with your goals and market conditions. This helps the investors stay focused on their risk-return parameters and select funds that meet them while weeding out the funds that do not serve the said purpose. Rebalancing the portfolio can involve selling equity funds and investing in debt mutual funds to achieve desired asset allocation and reach investment objectives in an optimised manner.
Now that we have seen the various tips or strategies to maximise returns from mutual fund investments, let us also review some common mistakes to avoid in the mutual fund investment process.
Investing without clear goals
Trying to time the market
Panic selling during market volatility
Over-diversification while diversifying investments
Investing without thorough market and fund research
Investing without accounting for tax implications
Copying other’s investment portfolio
Focusing only on short-term returns
Mutual fund investment has become the most popular form of investment over the decades. However, most investors lack the basic knowledge or tips to maximise their returns and get the most from their mutual fund investments. However, with the abundance of resources available today, understanding and investing in mutual funds has become easier than ever. Mutual funds can help investors achieve their financial goals with patience and discipline while effectively navigating market risks.
We hope this blog is able to highlight the basic investment strategies for investors and help them build a robust investment portfolio. Let us know if you have any queries on this topic and we will address them.
Till then Happy Reading!
Read More: PE Ratio in Mutual Funds
Marisha Bhatt is a financial content writer @TrueData.
She writes with the sole aim of simplifying complex financial concepts and jargon while attempting to clarify technical and fundamental analysis concepts of the stock markets. The ultimate goal is to spread vital knowledge and benefit the maximum audience. Her Chartered Accountant background acts as the knowledge base to help clarify crucial concepts and create a sound investment portfolio.
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