Mutual Funds have gathered remarkable momentum in recent times - that the industry's AUM (Assets under Management) have zoomed from 12 lakh crores to 19 lakh crores in the thirteen months since April 2016 bears ample testimony to the fact. If you're an existing investor into Mutual Funds, here are five simple tips to max out your portfolio returns
Follow an Asset Allocation strategy
Most investors, especially first timers, are clueless about asset allocation and its benefits. While it rings true that asset allocation bears limited significance if you're just starting out with a small monthly SIP, it becomes increasingly significant as your portfolio size crosses certain thresholds. For instance, you may have started a monthly SIP of Rs. 20,000 into equity funds. Within two years, you're likely to have accumulated 5 lakhs or more. At this stage, you'll want to divide your accumulated lump sum amount between equity and fixed income funds, in a ratio that's in line with your risk appetite and time horizon. Resolutely sticking to your target asset allocation through continual rebalancing is the key to making unemotional investment decisions and not succumbing to some common behavioral traps which may tarnish your long-term returns.
Watch out for Loads and Taxes
While entry loads were banned by SEBI in 2009, exit loads still prevail. Different funds have different load structures, ranging from 0.5% to 2% within anything from 10 days to 18 months. Make sure you gain clarity on the load structures of each of the funds that you hold in your portfolio, or you could end up bearing unnecessary expenses. There have been instances of clients unmindfully initiating STP's (Systematic Transfer Plans) from debt funds that have inbuilt exit loads before a year, effectively losing out on 0.5% with every switch transaction! Similarly, there have been instances of clients redeeming their SIP's after running them for 12 months, with the mistaken belief that no exit loads would apply because they ran their SIP's for a year. In reality, each SIP tranche counts as a distinct purchase, and therefore has an exit load attached to it for the specified duration, starting from the date of the particular SIP debit. Similarly, debt oriented funds tend to be significantly more tax efficient if they're held on to for three years or more. However, their dividends, at 28.33% tax deducted at source, tend to be extremely tax inefficient. Make sure you acquaint yourself properly with all the loads and taxes associated with your funds, and you may be able to extract a few additional percentage points of return from your portfolio.
Restrict your number of funds
Commoditized as they are, Mutual Funds are often "bought" in a mindless manner by investors. As a result, many Mutual Fund portfolios start looking like shopping lists over time, with tens of funds present! Holding too many Mutual Fund schemes in the name of "diversification" is a sure-fire way to compromise on the long-term performance of your portfolio. The act of buying too many funds eventually reduced the "alpha" or outperformance quotient of your portfolio, and also makes it difficult to track where your money is and what your precise split between low risk and high risk assets is at any stage. For best results, invest into no more than 5 equity funds and 5 debt funds at any time. If you're got more money to invest, bulk up the existing folios or replace the existing funds, if careful evaluation reveals that it's worth doing so.
Add SIP's to the mix
SIP's or Systematic Investment Plans are like rocket fuel for your Mutual Fund portfolio. They help you dispassionately ride out market cycles and earn returns that are consistently higher than savings schemes or life insurance policies, over lengthy timeframes. No wonder than that nearly 75 lakh new SIP folios were added in the last Financial Year! For best results, start SIP's in your existing portfolio of schemes, rather than unnecessarily increasing the number of funds that you hold.
Link it to a Financial Plan
Studies, as well as anecdotal evidence, have suggested that it's wise to link your Mutual Fund portfolio to a well drafted Financial Plan that details your various life-stage based goals as a road map of sorts. Doing so not only helps you maintain investment and savings discipline, but also automatically aligns your choice of asset class with the investment duration, thereby optimizing portfolio returns. Saving in an ad hoc manner will leave you susceptible to making regular, unplanned drawings on your Mutual Fund portfolio, thereby robbing you of the potential acceleration that could've arisen from the future compounding of your returns. A Financial Planner can help you smartly link your Mutual Fund portfolio to your various financial goals, and structure your portfolio accordingly. The benefits of doing so are incontestable.
"This article was contributed by Guest author, Aniruddha Bose, Editorial Consultant with BW Businessworld and was posted on www.businessworld.in.”
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