Despite being one of the most versatile investment options for investors with varied risk profile, time horizon, needs and goals, mutual funds (MFs) have not been able earn their rightful place in the investment universe. While every investor hopes all the funds in his portfolio to do well at all times, in reality, the performance of some may slip for different reasons. Apart from a natural phenomenon called volatility, the portfolio performance may also get adversely impacted by wrong selection of funds, ignoring non-performance, redeeming funds in a hurry and following illogical strategies. Here’s how you can get better results from your MF investments:
Invest in quality funds
If you choose a good quality fund, your investment is likely to appreciate steadily over time, overcoming most temporary setbacks. Besides, your MF portfolio should always be aligned with your risk profile by ensuring the right balance in terms of exposure to different market segments, that is, large-cap, mid-cap and small-cap.
Despite taking all precautions you may still have to face erratic performance. However, if the fund falls in line with its benchmark index as well as its peer group, it should not be much cause for concern. Remember, a good quality portfolio always makes a comeback.
Ensure the right balance between risk and reward
Tracking performance of your portfolio on a regular basis, is essential to ensure success. Ideally, to analyse performance, you must consider returns as well as the risks taken to achieve those returns. Therefore, the questions you need to address are how much risk did the fund manger subject you to and did he give you an adequate reward for taking that risk. If the portfolio composition of a fund takes you beyond your defined risk-taking capacity, don’t hesitate to get rid of such a fund.
Follow a strategy to sell your funds
While there is no set formula for determining the perfect time to sell a mutual fund investment, or for that matter any investment, it pays to have a strategy in place to make selling decisions. Here are some of the guidelines:
- You may consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.
- You may consider exiting from a fund if its performance has seriously lagged its peers for a period of one year or so.
- You may consider selling a fund when it no longer meets your needs. If you have done a good job of selecting the fund initially, this will only be the case if the fund changes its objective or investment style, or if your needs change.
Avoid investing in a fund just before the dividend is paid
Many investors believe investing in an equity fund just before the dividend payment is a smart strategy. If you are one of those, think again. When you invest in a fund just before the dividend payment, you receive a part of your own capital back as dividend. Besides, by keeping your focus on dividend, you may end up investing in a fund that doesn’t merit an investment. Remember, dividend payment is an ongoing process of distributing gains to its unitholders and only those who remain in the fund for a considerable period benefit from it in the real sense.
Therefore, to invest in a fund where the immediate dividend payment is the main attraction is not a smart strategy after all. The right way to invest is to carefully select funds based on the quality of portfolio, consistency in performance and suitability of the fund according to your asset allocation.
The writer is CEO, Wiseinvest Advisors
