MFs

5 Simple Steps to ensure Superior Returns on your Mutual Fund portfolio Or One Super Simple Step.

In the past few months, you have seen the Sensex move from the 8,000 level at the beginning of March 09 to a 17,500 levels in Nov 09 - an increase of approximate 120%. 

It has more than DOUBLED in just 9 months.

However, this was an exceptional event driven by exceptional factors.

As an investor, you may be asking questions to yourself?

Did I benefit from this huge upsurge? Did I invest my money and see it grow phenomenally over this period?

The preconditions in both of the above questions are:

a) You had invested the money when the opportunity was there.

b) You had invested the money in the RIGHT investments.

A smart investor would do both.

Let me elaborate point (b) above.

Did you know that over a 3 year period 56 % of equity mutual fund schemes have struggled to deliver returns even similar to the Index? They have failed. So much for depending on expert fund managers and their research.

On the other hand there were only 44% equity mutual fund schemes who delivered returns more than the Index. They outperformed the Index.

Were you able to identify those schemes? And if you are asking yourselves how, we will provide you an answer shortly.

A small factual snippet...

Are you holding on to mutual fund schemes that have FAILED to deliver in your portfolio?

Or, worse, are you stuck with an overall bad portfolio?

We are not surprised! 

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Mutual Funds are a simple and sensible way of investing money to build long term wealth.

As investment instruments they should be an integral part of your portfolio. The range and ease of investment that mutual funds have to offer, is unparalleled.

Diversified Equity Funds, Balanced Funds, Gold or Cash and Liquid Funds... they are all there to meet one of your needs.

While variety is good, it could also be a trigger for confusion. With a lot of "me too" amongst them, selecting the right fund for yourself is not an easy task.

However, help is at hand.

And you get this in easy to follow, 5 Simple Steps.

Read them carefully! They are critical mantras of successful investing. Follow them with discipline, and you will surely reap the benefits.

So, here are the 5 Simple Steps which will ensure that you get superior returns through your mutual fund investments.

Step 1: Know your fund

Try answering this question. Do you know the objective of every fund that you have invested in? ‘Making money!”, did we hear that? We beg to differ.

Take for example a large equity diversified fund which belongs to a well known fund house. It follows an index plus style of investing and invests at least 60% of its money from a selection of stocks in the BSE 200 Index.

The fund has a large cap bias and hence is suitable for those investors who can take medium to high risk (you take risk when the outcome of an event that you undertake is not certain. In Investments, risk could lead to less than expected returns. It could mean losing a portion or all of your investment).

When you know the objective of a fund, it is easier for you to set an expectation and align the fund selection. You should not be investing in a midcap fund if you cannot live with the volatility and risk that it will display.

Step 2: Make time tested (read experienced) funds a larger part of your portfolio

More new funds are churned out by the marketing machinery of the mutual fund house than a real attempt to add value to your portfolio. Just avoid them!

Also avoid the sectoral/thematic funds as they tend to work in cycles with a restricted investment objective. We are currently seeing the launch of PSU funds. Ridiculous! Avoid! Avoid!

There are many time tested funds with fantastic track records available to meet your needs. Make them a larger part of your portfolio. Like: HDFC Top 200

Step 3: Keep Returns expectations aligned with the risk you are taking

Returns are a function of many factors: risk being a key one. The play of risk in the investment world is often not understood correctly. Remember, higher the return, higher the risk!

While you want to have the maximum returns, you may not realize that you may take on the maximum risk. Imagine driving at top speed. The chances of an accident grow exponentially. With high risk or untested equity mutual funds, you could be taking yourself down the same path.

So do not over expect. Know your risk taking ability and select your funds accordingly. Remember, star ratings would not help you do that. It is a deeper understanding over a period of time of the nature of performance that is going to reflect the correct risk of the fund.

Step 4: Review your portfolio regularly - avoid frequent churning

Over a period of time, a portfolio needs to be rebalanced to reflect changes in your needs and risk taking ability. Compositions of funds undergo change and so does their performance. Hence it is necessary to review the portfolio regularly, at least annually, so as to ensure that it remains on track to deliver on your expectations.

However, avoid frequent churning, which can increase your overall expenses (not to forget taxes) and bring down your total returns.

Step 5: Take informed decisions. - Keep yourself updated.

Track important economic variables like interest rates, inflation, and industry growth. Put simply, be observant and look for economic activity around you to understand of what is happening.

Seek researched and unbiased views from experts. While it cannot be denied that some of your agents/advisors are genuine and honest in their advice, many are not.

So, you have to take control of your own investments and portfolio and seek the right information inputs from a source which has no interest in selling a particular mutual fund to you.