Making mutual funds work for you

Mutual funds represent the shifting investor sentiment towards disciplined and long-term wealth accumulation. It is the young investors who are emerging as a powerful force behind the growth of mutual fund investments in India, with platforms like Groww witnessing a significant surge. According to studies, nearly 50 per cent of the new systematic investment plans (SIPs) have been initiated by individuals under the age of 35. Data also suggests a rise in the financial engagement among women.

According to the Association of Mutual Funds in India data, the SIP contribution stood at an all-time high of Rs 24,509 crore in September as against Rs 23,547.34 crore in August. The number of SIP accounts touched 9.87 crore in September, up from 9.61 crore in August. Last month, 27 open-ended mutual fund schemes were launched, raising Rs 14,575 crore.

In the current fiscal year (FY25), till September 2024, the industry received total SIP inflows of Rs 1,33,925 crore. In FY 2024, the figure was Rs 1,99,219 crore and in FY 23, it was Rs 1,54,972 crore.

The average SIP flows per month have grown by 72 per cent from Rs 13,000 crore per month in FY-23 to Rs 22,320 crore per month in FY-25 (till September). Since everyone is investing in mutual funds for better returns compared to traditional savings instruments,, the question arises — what are the steps one should take for better returns?

“When investing in mutual funds (MFs), avoiding basic errors may greatly improve alpha generation — the extra returns produced above a benchmark. Over time, profits can be eroded by common errors like chasing previous success, lacking diversity and making emotional decisions,” says Amar Ranu, head, investment products and insights, Anand Rathi Shares and Stock Brokers.

Past performance

Previous performance is seldom a good indicator of future success, but many investors are attracted to put their money into funds that have excelled in the recent past, expecting that the trend will continue. This can lead to overexposure in particular sectors or styles, increasing risk without adding value.

Diversification

Concentrating investments in a single asset class or fund can lead to losses during market downturns. The portfolio is exposed to certain market risks when assets are concentrated in a small number of funds or industries, which reduces the possibility of steady, long-term development. Conversely, a well-diversified portfolio increases total returns by distributing risks and seizing opportunities across asset classes and geographical areas.

Emotional decisions

Emotional decision-making, such as reacting to short-term market fluctuations, often leads investors to sell low and buy high, further hurting the alpha factor. Allowing emotions like fear or greed to drive investment decisions can result in making poor choices. Sticking to a disciplined investment strategy, based on long-term goals and thorough research, helps avoid such pitfalls.

Portfolio rebalancing

Not reviewing your portfolio periodically can lead to problems and missed opportunities. Regular portfolio reviews and rebalancing can also prevent drift from the intended investment objectives. Investors may safeguard their portfolios and set themselves up for improved alpha creation by avoiding these preventable mistakes, which will guarantee more reliable and advantageous investing results.

Realistic expectations

Beginners typically look for the highest returns. They want the best-performing fund to continue the trend. But it’s wrong to keep such unrealistic expectations from a fund. Mutual funds are not meant to make anyone rich in months. Rather, they are meant to ensure long-term financial wealth.

Joining the herd

Very often, investors do not exercise personal judgment and get carried away by the buzz in the ‘market’ and thus make the wrong choice. One should have proper understanding before investing and since the risk profile of every individual is different, what may be right for others may not be right for you.

Timing the market

Timing the market involves attempting to buy and sell mutual funds based on predictions of market movements. Trying to predict the best times to buy or sell investments is difficult even for experienced investors. While this strategy may seem appealing, executing it isn’t easy. This is because no one, not even the most seasoned investor, can accurately predict how markets will behave.

Risk tolerance

Every investor has a unique risk tolerance and ignoring it can lead to investing in funds that are too risky or too conservative.

Over-diversification

Putting your money into too many different mutual funds is a common mistake. Wide diversification also leads to a problem of plenty. It is often highly cumbersome to keep a track of too many investments. In such a case, there is a probability that you would not be able to keep an eye on the investment objectives or if the portfolio needs rebalancing, leading to potential losses.

Mid, small-cap funds

In the recent past, mid and small-cap funds have attracted a lot of attention. In bull runs, these funds tend to give amazing returns, and many investors find that too difficult to ignore. So, it’s obvious that people would want to invest in mid-cap and small-cap funds. However, opt for these only if you are willing to take a higher risk for better returns.

The risk that an investor carries will depend on the scheme. So, it’s important to select the right kind of scheme for a defined investment objective. Also, since investments are staggered over a number of years, the actual benefits start getting meaningful visibility in the portfolio only after four to five years. So, come with a long-term mindset. It’s not a short-cut to make money.

Importance of Financial Goals

• Provide a clear purpose and direction for your investment strategy.
• Whether you are saving for retirement, purchasing a house, or paying for your child’s education, it helps you realise what you are aiming for.
• Having a defined aim keeps you focused on long-term success rather than responding to short-term market volatility.
• New investors should first identify and divide goals into short-term and long-term, based on the goal horizon. If a goal is less than two years, it should be treated as short-term.