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Smart strategies to use in the current Market Conditions for Mutual Fund investment

  • Rudri Rawell
  • Jan 12 2022
  • 6 minutes
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Mutual funds have attracted millions of investors as their acceptance has grown exponentially among retail investors in the past decade. Investors prefer mutual funds in the hope to generate attractive returns through exposure to both debt and equity. This, combined with the declining bank FD returns in a falling interest rate regime, has seen many investors switch to mutual fund investments.

Mutual fund investing requires a certain amount of risk appetite, patience for returns, and efforts in learning about and selecting the right scheme. Apart from investing the pooled money in the right investment vehicles, mutual funds offer benefits such as diversification and asset allocation. 

Considering the current market volatility driven by the ongoing Covid-19 pandemic , retail investors are uncertain about their mutual fund investment. Investors can, however, deploy some of the below-mentioned smart strategies to generate positive returns from their mutual fund investments.

Adopt diversification 

Mutual fund returns generally vary across various schemes depending on the investment decisions made by the fund manager. Returns are also dependent on the asset classes chosen, fund category, and the overall economic environment. For instance, asset classes such as gold and equities are inversely related to each other. Gold funds tend to perform well in economic uncertainties, on the other hand, equity funds may dwindle during such situations.

A well-planned and implemented portfolio diversification allow optimum exposure to different fund categories across asset classes. This can help in generating risk-adjusted returns as per the investor’s risk appetite and investment time horizon. 

However, investors must avoid over-diversification or spreading investments across many funds within the same investment strategy. Numerous funds within the same portfolio can make it difficult to keep a track of the funds’ performances and may adversely impact net portfolio returns.

Use SIP

SIP allows investors to invest a small amount at regular intervals, like weekly, monthly, quarterly, etc, in a mutual fund scheme. SIP ensures financial discipline through regular investment. The minimum amount required for investing in the majority of equity funds can be as low as Rs 100-1,000. Thus, investors with limited monthly income can also benefit from investing inequities.

Automated investments at regular intervals can provide the benefit of rupee cost averaging since investors can purchase units at lower NAVs during market downturns. This allows averaging of the investment cost and reduces the need to regularly monitor the market movements for timing an investment.

Invest through direct plans

Direct plans generally have lower expense ratios as compared to regular plans. This is because the fund houses do not incur any distribution expenses when it comes to direct plans. Thus, direct plans have better chances of fetching higher returns than regular plans. While the difference in returns could be trivial at the start, it can turn into significant profits in the long term because of the compounding effect.

For example, if an investor invests using Rs. 10,000 per month in a regular plan of an equity mutual fund that has an expense of 2%, his investment corpus may reach approximately Rs 73.41 lakhs after 20 years. This is assuming an annualised return of 12%. If he invests in a direct plan of the same fund with an expense ratio of 1% for the same duration, the corpus may reach Rs 84.25 lakhs. The difference between both the cases is Rs 10.84 lakhs or 13% higher returns through direct plan. Hence, it makes sense to invest in direct plans to generate a larger corpus in the long term.

Track fund performance

It is important to periodically review the performance of the mutual fund in which you have invested. This way you will be able to track the results through various market conditions and compare them against peer funds and benchmark indices. Even mutual funds that have had outstanding returns in the past may underperform in the future. Hence, you must compare the funds’ returns in the past 1 year against peer funds and benchmark indices. In case the existing mutual fund investment is constantly underperforming against peers and benchmarks, you may consider redeeming your investment.

Adopt a combination of active and passive fund investment

While there is no ideal combination of active and passive fund investment, you can explore a combination that works best for your investment goals. Try to use index funds within your portfolio to maintain strategic consistency and achieve long-term investment goals, mainly through large-cap exposure. Check the Finity App to see a wide range of passive Index funds you can invest in.  Active funds can be used to gain exposure to mid- and small-cap segments, as per your risk preferences.

Conclusion

Apart from adopting smart strategies to gain positive returns from mutual fund investments, you must have patience and perseverance while being invested in these. Try to gain as much market knowledge as possible to stay on top of your mutual fund investment and make the most of it.

FAQs

  1. How to invest in mutual funds?
    You can invest in mutual funds by downloading the Finity app. The app lists some of the top-performing funds under various categories and you can choose funds as per your investment time horizon and risk appetite.
  1. When should I redeem mutual fund investment?
    The right time to redeem mutual fund investment is based on your financial goals. Make sure to estimate your financial goals before investing in a mutual fund so that you can plan the redemption accordingly.
  1. Are mutual fund investments safe?
    Mutual fund schemes come with different risk ratings. Investors who have a high-risk appetite may invest in equity or hybrid schemes that have a high-risk ratings. Those who are risk-averse may choose debt or fixed-income funds that are less risky and can provide predictable returns.
  1. Is it better to invest through SIP or lump-sum in mutual funds?
    SIP investment in mutual funds allows you to have an investment discipline, as you can make small investments periodically. On the other hand, lump-sum investment is ideal for those who have sufficient cash on hand and can park their funds for some time.
  1. Should I invest in mutual funds without market knowledge?
    You can invest in mutual funds without having in-depth market knowledge since most mutual funds are managed by fund managers who have expertise and knowledge to make investment decisions as per the fund’s objective.
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