To maximise profits from mutual fund investments, here is what you must do
The returns promised by most mutual fund schemes might tempt the investors to put their money in them. However, to really make good money, investors must do one important thing - to allow their money to grow, enough time should be given to the investment.
Mutual funds have been gaining popularity in India among retail investors. They promise higher returns than most other investment options and come with relatively lower risk than direct equity investment. They also save investors from a lot of headaches in terms of time and effort. According to the data provided by the Association of Mutual Funds of India (AMFI), the inflow in equity and equity-oriented mutual funds registered a growth of over 100 per cent in March. The flow in equity and ELSS mutual fund schemes jumped to Rs 11,756 crore in March 2019 as compared to Rs 5,122 crore in February 2019. The retail assets under management (AUM), including balance funds, equity funds, and Equity-Linked Savings Scheme (ELSS) rose to Rs 10.73 lakh crore from Rs 10.01 lakh crore as of February 2019.
The returns promised by most mutual fund schemes might tempt the investors to put their money in them. However, to really make good money, investors must do one important thing - to allow their money to grow, enough time should be given to the investment. Sandeep Bhardwaj, Chief Sales Officer, Angel Broking Ltd told Zee Business Online that when it comes to mutual funds (especially equity mutual funds), time matters more than timing.
"Over the short term, equity as an asset class can be extremely volatile and therefore, subjective to sub-market or negative returns over the short term. The ideal period you must consider for investing in equity funds is a time frame of at least 5 years," Bhardwaj added.
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Why is it important to stay invested for long?
There are two reasons for that. Bhardwaj explains that the investors should keep the compounding aspect in mind. "The longer you hold on to equities as an asset class, the more your principal invested earns returns and the more your returns generate further returns. This is called the power of compounding and works best in the long run. Also, most equity investments take time to translate into stock holder returns. That is why a longer term perspective is advised for equity funds," he said.
Benefits of staying invested for long?
Archit Gupta, Founder & CEO ClearTax told Zee Business Online says that long term investors get to enjoy the benefit of Rupee Cost Averaging. "The continued SIPs fetch more units during the market slump and lower units during a market rally. Over the long run, the overall cost of investment averages out. It has a positive impact on boosting returns," he said. Also, investments in mutual funds are made to achieve certain financial goals. These goals can only be achieved if the investor stays in a scheme for a long period. "Gupta added, He/she needs to choose funds which are compatible with his goals, risk tolerance and investment horizon. Once he/she starts investing, he/she needs to be committed towards the SIPs."
How to choose mutual fund schemes?
To ensure that you are committed to the funds, it is important to choose the right ones. For this, you need to track their performance over the last few years and make the best decision. Gupta explained, "Look for funds which have exhibited consistent performance over the long run. You may consider the risk-adjusted returns for the same."
He added that redemption of units needs to be planned as per the maturity of the goal as well, but also added, "Unplanned redemption may lead to loss of returns and even non-accomplishment of goals."