VMPL
New Delhi [India], July 3: Investment in mutual funds has become very popular in India, with mutual fund assets approaching a staggering Rs 60 trillion in May 2024. In the fiscal year 24, domestic mutual fund assets grew 34 percent, the largest increase in seven years. This rise indicates a growing awareness among Indian investors about the benefits of mutual funds. However, you must choose your mutual funds wisely to maximize returns.
Today, there are several mutual fund options to choose from. But which one can maximize your returns? What are the essential factors to consider when choosing the right mutual fund for your investment objectives? Here are the key considerations.Define your investment objectives
Start by clearly defining your investment objectives. Ask yourself if you are investing for any of these or other specific goals:
1. Short-term profits (your goal is to make profits in a shorter period of time, less than 1 year),2. Long-term wealth accumulation (you focus on growing your money significantly over the long term by staying invested for more than 1 year)
3. Retirement
4. Education of child 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 may be suitable. These funds have shorter maturity periods, typically ranging from one day to a few days. Debt funds offer stable returns in the form of interest earnings and allow you to have faster access to your money.
For long-term goals, you can opt for a mix of equity and hybrid funds in your portfolio. Equities tend to be volatile in the short term. Staying invested in stocks for a longer period can offer greater benefits. You may also have goals that require a combination of short-term and long-term approaches. For example, you can invest in a hybrid fund that offers stability and growth. This way, you can save for your child's school fees next year and at the same time plan for their higher education 10 years from now. This blended approach balances your immediate and future financial needs.
You may 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 also targeting substantial growth over time.
Assess your risk toleranceThe next step is to check your risk tolerance. Risk tolerance is nothing more than your ability and willingness to withstand market volatility and possible financial losses. The Securities and Exchange Board of India (SEBI) has made it easier to choose a fund based on your risk tolerance. It has classified mutual funds into 6 different categories based on 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, which offer minimal risk.
* Low to moderate risk: These funds strike a balance between safety and moderate returns.* Moderate risk: Mutual funds that have a moderate risk profile often combine equity and fixed income investments in their portfolio. Therefore, these may suit your needs if you are comfortable taking on some level of risk.
*Moderately high risk: If you are willing to take on greater risk for the potential for higher returns, these funds may be suitable. They tend to have a larger allocation to stocks.
* High risk (stock funds) – These funds are perfect for you if you can withstand significant market volatility for potentially substantial long-term gains, primarily by investing in stocks. * Very high risk – If you have a high risk appetite and If you are prepared to face severe market fluctuations with the possibility of very high returns, these funds are for you. They often include thematic or sector equity funds.
Each mutual fund scheme calculates its risk value based on specific parameters and displays it on a risk meter, showing your risk level. You can check the risk meter while choosing a mutual fund plan to understand your risk level. Depending on your goals and risk level, you can create a balanced portfolio of mutual fund investments.
Examine Fund PerformanceAs they say, "Always learn from the past to plan for the future."
Before investing in any mutual fund, look at its performance over the years. For example, some of India's top equity funds have delivered annual returns of over 15 per cent over the past five years.
Also consider a factor known as "risk-adjusted returns." This tells you how much risk the fund took on to earn 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 a better return 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 the Sharpe ratio of a mutual fund scheme in the fund's fact sheet, which can be accessed from the website of the fund house or the investment platform. through which he invested.
Cost of investing in mutual funds
Investing in mutual funds involves several expenses that can affect your returns. The expense ratio is one of those costs. It covers the administrative and management fees charged by fund houses. As per SEBI guidelines, equity funds typically have an expense ratio of 1.05 to 2.25 per cent, while debt funds are around 0.8 to 2 per cent. Most experts would suggest going for a lower expense ratio because that would mean higher returns for you. Analyze Portfolio Composition
Understanding where your money is invested is essential. Start by examining the key sectors in which the fund invests. For example, in 2024, most equity funds will have significant holdings in the technology and financial services sectors. This sector allocation may influence the fund's performance.
For debt funds, focus on credit quality and maturity of securities. Funds with greater exposure to AAA-rated securities are generally considered safer due to their lower risk of default. Additionally, the maturity profile of the securities can affect the fund's sensitivity to changes in interest rates. Check the fund manager's track record
A skilled fund manager can make a significant difference. Evaluating the track record of the fund manager involves looking at their experience, investment philosophy, and performance during different market cycles. Consistency in performance, especially during market downturns, is a good indicator of a capable fund manager.
Use SIPSystematic 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 a few units each month. It helps create financial discipline and allows your money to grow steadily over time.
According to AMFI data, investors using SIPs have averaged 12 to 15 per cent returns in equity funds over the last decade. SIPs allow you to benefit from rupee cost averaging, which basically means you invest a fixed amount regularly, irrespective of market conditions. This approach reduces the impact of market volatility, because more mutual fund units are purchased 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 expanding rapidly and offering numerous options, choosing the right fund becomes essential.
New Delhi [India], July 3: Investment in mutual funds has become very popular in India, with mutual fund assets approaching a staggering Rs 60 trillion in May 2024. In the fiscal year 24, domestic mutual fund assets grew 34 percent, the largest increase in seven years. This rise indicates a growing awareness among Indian investors about the benefits of mutual funds. However, you must choose your mutual funds wisely to maximize returns.
Today, there are several mutual fund options to choose from. But which one can maximize your returns? What are the essential factors to consider when choosing the right mutual fund for your investment objectives? Here are the key considerations.Define your investment objectives
Start by clearly defining your investment objectives. Ask yourself if you are investing for any of these or other specific goals:
1. Short-term profits (your goal is to make profits in a shorter period of time, less than 1 year),2. Long-term wealth accumulation (you focus on growing your money significantly over the long term by staying invested for more than 1 year)
3. Retirement
4. Education of child 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 may be suitable. These funds have shorter maturity periods, typically ranging from one day to a few days. Debt funds offer stable returns in the form of interest earnings and allow you to have faster access to your money.
For long-term goals, you can opt for a mix of equity and hybrid funds in your portfolio. Equities tend to be volatile in the short term. Staying invested in stocks for a longer period can offer greater benefits. You may also have goals that require a combination of short-term and long-term approaches. For example, you can invest in a hybrid fund that offers stability and growth. This way, you can save for your child's school fees next year and at the same time plan for their higher education 10 years from now. This blended approach balances your immediate and future financial needs.
You may 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 also targeting substantial growth over time.
Assess your risk toleranceThe next step is to check your risk tolerance. Risk tolerance is nothing more than your ability and willingness to withstand market volatility and possible financial losses. The Securities and Exchange Board of India (SEBI) has made it easier to choose a fund based on your risk tolerance. It has classified mutual funds into 6 different categories based on 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, which offer minimal risk.
* Low to moderate risk: These funds strike a balance between safety and moderate returns.* Moderate risk: Mutual funds that have a moderate risk profile often combine equity and fixed income investments in their portfolio. Therefore, these may suit your needs if you are comfortable taking on some level of risk.
*Moderately high risk: If you are willing to take on greater risk for the potential for higher returns, these funds may be suitable. They tend to have a larger allocation to stocks.
* High risk (stock funds) – These funds are perfect for you if you can withstand significant market volatility for potentially substantial long-term gains, primarily by investing in stocks. * Very high risk – If you have a high risk appetite and If you are prepared to face severe market fluctuations with the possibility of very high returns, these funds are for you. They often include thematic or sector equity funds.
Each mutual fund scheme calculates its risk value based on specific parameters and displays it on a risk meter, showing your risk level. You can check the risk meter while choosing a mutual fund plan to understand your risk level. Depending on your goals and risk level, you can create a balanced portfolio of mutual fund investments.
Examine Fund PerformanceAs they say, "Always learn from the past to plan for the future."
Before investing in any mutual fund, look at its performance over the years. For example, some of India's top equity funds have delivered annual returns of over 15 per cent over the past five years.
Also consider a factor known as "risk-adjusted returns." This tells you how much risk the fund took on to earn 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 a better return 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 the Sharpe ratio of a mutual fund scheme in the fund's fact sheet, which can be accessed from the website of the fund house or the investment platform. through which he invested.
Cost of investing in mutual funds
Investing in mutual funds involves several expenses that can affect your returns. The expense ratio is one of those costs. It covers the administrative and management fees charged by fund houses. As per SEBI guidelines, equity funds typically have an expense ratio of 1.05 to 2.25 per cent, while debt funds are around 0.8 to 2 per cent. Most experts would suggest going for a lower expense ratio because that would mean higher returns for you. Analyze Portfolio Composition
Understanding where your money is invested is essential. Start by examining the key sectors in which the fund invests. For example, in 2024, most equity funds will have significant holdings in the technology and financial services sectors. This sector allocation may influence the fund's performance.
For debt funds, focus on credit quality and maturity of securities. Funds with greater exposure to AAA-rated securities are generally considered safer due to their lower risk of default. Additionally, the maturity profile of the securities can affect the fund's sensitivity to changes in interest rates. Check the fund manager's track record
A skilled fund manager can make a significant difference. Evaluating the track record of the fund manager involves looking at their experience, investment philosophy, and performance during different market cycles. Consistency in performance, especially during market downturns, is a good indicator of a capable fund manager.
Use SIPSystematic 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 a few units each month. It helps create financial discipline and allows your money to grow steadily over time.
According to AMFI data, investors using SIPs have averaged 12 to 15 per cent returns in equity funds over the last decade. SIPs allow you to benefit from rupee cost averaging, which basically means you invest a fixed amount regularly, irrespective of market conditions. This approach reduces the impact of market volatility, because more mutual fund units are purchased 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 expanding rapidly and offering numerous options, choosing the right fund becomes essential.
