Equity mutual funds are the greatest alternative among the others for long-term wealth growth to meet financial goals such as retirement or property ownership. The reason for this is that the best performing stock mutual funds have achieved annualized returns of over 20% in the last ten years, resulting in Rs. 1 lac invested by ordinary investors becoming Rs. 6 lacs. However, in order to maximize the potential of mutual funds, it is recommended that you either go online and select the correct mutual fund based on past performance or hire an independent financial expert.
You should also consider your risk tolerance, as there are several sorts of mutual funds based on risks, such as large-cap, mid-cap, and small-cap funds. Thematic funds, such as pharma funds, are available. Small-cap funds, for example, are riskier than mid-cap funds. Even with the reintroduction of the long-term capital gains tax, stocks are still more tax-efficient and deliver higher returns than other asset types. Certain mutual funds, such as the Equity Linked Savings Scheme, offer tax advantages under Section 80C.
How to Get the Most Out of Mutual Funds
Finding and purchasing the finest mutual funds isn’t the only way to get the best results. To enhance success, there are a few timeless investing guidelines and mutual fund investing ideas. Instead of chasing performance, there are five basic steps you can take to assist in maximizing your returns.
Invest in No-Load Funds
When it comes to modifying your portfolio to generate higher returns on your investments, costs are important. It should go without saying that no-load funds are preferable to load funds when it comes to keeping costs down. You have more money working for you because you aren’t paying any loads, which increases performance. If all other factors are equal, the fund that does not impose a load will keep more money in investors’ pockets than the ones that do.
Invest in index funds.
Index funds improve returns in the same way that no-load funds do. By keeping costs low, you can keep more of your money working for you in the long run, increasing your total returns. The benefits of index funds, however, do not end at cheaper expenses. These funds are also free of manager risk, which is the chance that poor management decisions will hurt the fund’s performance.
Invest in Mutual Funds on a Dollar-Cost-Average Basis
Dollar-cost averaging (DCA) is an investment technique that involves purchasing investment shares on a regular and periodic basis. DCA’s strategic value is to lower the investment’s overall cost per share (s). In addition, the majority of DCA plans include an automatic purchasing schedule. A regular purchase of mutual funds in a 401(k) plan is an example. This automation eliminates the risk of an investor making erroneous decisions as a result of emotional responses to market volatility.
Invest in Sector Funds or Aggressive Mutual Funds.
Many investors believe that investing in high-risk funds will provide them with larger returns. This, however, is only partially correct. Yes, in order to achieve above-average returns, you must be willing to take on additional market risk. However, you can do so while reducing risk by diversifying across different types of aggressive funds.
Allocation of Assets
You don’t have to rely just on aggressive mutual funds to achieve higher long-term returns. Asset allocation, not investment selection, is the most important aspect in determining a portfolio’s returns. For example, if you were lucky enough to invest in above-average stock funds in the first decade of this century, from the beginning of 2000 to the end of 2009, your 10-year annualized return would not have likely outperformed average bond funds.
Although stocks and stock mutual funds typically beat bonds and cash over long periods of time (particularly three years or more on average), they can nevertheless underperform bonds and bond mutual funds for durations of less than ten years.
So, if you want to maximize profits while keeping market risk to a minimum, a bond-heavy asset allocation may be a good choice. Let’s imagine you wish to invest for ten years and want to maximise your earnings by using stock mutual funds. However, you want to minimize the danger of losing your principal to a minimum. In this instance, you might stay aggressive with an allocation of 80 percent stock funds and 20 percent bond funds to mitigate risk.