How to Maximize Mutual Fund Investment Returns: A Complete Guide

 last updated on: 30-Nov-2024 05:50PM IST

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If you're already investing in Mutual Funds to achieve your financial goals, this article will help you enhance your overall returns. Whether you've selected your mutual fund yourself or with the guidance of a financial advisor or distributor, it's important to periodically reassess your strategy to ensure you're making the most of your investment. Also, check yourself that you're not making investments for the mentioned reasons to get trapped in a Mutual fund bubble.

Are You Investing in the Best Mutual Fund for Your Goals?

While you may have chosen a mutual fund that fits your financial objectives, have you made the best possible choices when it comes to plan type, investment method, and fund selection? Let's dive into key factors you may want to consider to optimize your mutual fund portfolio.

Did You Invest in a Direct Mutual Fund?

Check if you’ve invested in a Direct Mutual Fund. Investing directly in a mutual fund eliminates intermediaries like distributors, which means no commission fees are deducted from your returns. Most mutual fund schemes are tagged with either "Direct" or "Regular" in the fund name to help you identify which plan you’re invested in.

Example:  

• TATA Digital India Direct Plan-Growth
• TATA Digital India Regular Plan-Growth

Why Invest in Direct Mutual Funds?

Since Direct Mutual Funds cut out the middleman (distributors), you avoid paying commission fees, which results in higher overall returns. The Securities and Exchange Board of India (SEBI) introduced direct mutual funds in January 2013 to help retail investors purchase mutual funds directly, reducing costs and improving investment returns.

Is Your Mutual Fund an Active or Passive Fund?

Another important decision when investing in mutual funds is whether you’re choosing an Active Fund or a Passive Fund (e.g., index funds).

Why Choose a Passive Fund?

Passive funds, like index funds, mirror the performance of a market index (such as the Nifty 50 index). Since these funds don't require extensive active management or decision-making by fund managers, they tend to have lower expense ratios, meaning more of your money is working for you. Unlike active funds, which aim to outperform the market, passive funds simply track it.

Growth vs. Dividend Payout: Which Option Is Right for You?

When selecting a mutual fund, it’s essential to know whether you're investing in a Growth Fund or a Dividend Payout Fund. Here’s how they differ:

• Growth Fund: This option reinvests your earnings back into the fund to increase its value, making it ideal if your goal is long-term wealth accumulation.

• Dividend Payout Fund: These funds pay out dividends periodically, making them suitable for investors seeking regular income.

Example:  

• TATA Digital India Direct Plan-Growth

• TATA Digital India Direct Plan - IDCW (Income Distribution Cum Capital Withdrawal - Dividend Payout)

Scheme names diffirentiation

If you're focused on growing your wealth over time, a Growth Plan is the better choice. However, if you’re unsure about the differences between Direct vs Regular Plans or Growth vs IDCW, it’s never too late to make adjustments. You can easily switch your funds by following these steps: How to Switch Mutual Fund Schemes article by IIFL Capital.

Common Mistakes in Mutual Fund Investing and How to Avoid Them

Despite growing awareness, many investors still make common mistakes that can hinder their returns. One of the most frequent errors is poor management of  Systematic Investment Plans (SIPs).

The New Mistake in SIP Investment

As of October 2024, India has 9.87 Crore SIP accounts in India. Many investors rely on a single SIP on a fixed date each month. While SIPs help create discipline in investing, this approach may not be the most effective. Here’s why:

While SIPs offer advantages like cost averaging and the ability to invest regularly, using the same date each month may expose you to market timing risks.

How to Optimize Your SIP Investment Strategy

To make your SIP investments more effective and enhance your returns, follow these steps:

Step 1: Set Up a Dedicated Investment Savings Account

Transfer your monthly SIP amount into a separate savings account specifically for investment purposes. This will prevent you from using the funds for other expenses.

Step 2: Avoid Using Your Debit/Credit Card for This Account

To protect your investment funds, do not link this account to your debit or credit card. This ensures you won't inadvertently dip into your investment savings.

Step 3: Maintain a Buffer in Your Investment Account

Keep a buffer in your savings account to ensure you always have sufficient funds for your SIP, avoiding interruptions due to insufficient balance or bank charges. For example, if you’re investing ₹5,000 monthly, try to keep ₹5,500 in your account.

Step 4: Split Your SIP Into Multiple Portions

Instead of investing the entire amount through one SIP, divide your monthly investment into smaller portions. This will help you diversify your entry points and take advantage of market fluctuations. Example: If your monthly SIP is ₹5,000, divide it into 5 portions of ₹1,000 each. This allows you to invest at 5 different times of the month, reducing market timing risks.

Step 5: Modify Your Existing SIPs or Create New Ones

If your current SIP allows for modifications, reduce the amount and create new SIPs with the remaining balance. This way, you can spread out your investments throughout the month.

Step 6: Avoid SIP Step-Up Options during SIP creation

While step-up SIPs automatically increase your contribution every year, they may not always be the best choice for everyone. Instead, consider adjusting your SIP manually or create a new one as your financial situation allows.

FAQ: Optimizing Your SIP Strategy

• Will this method work for all types of mutual funds?

  | Yes, this strategy is applicable for all equity funds.

• Will it really enhance my returns?

  | By averaging your investments, this method can help smooth out market volatility and improve long-term returns.

• Can I create multiple SIPs for the same fund? 

  | Yes, there is no restriction on creating multiple SIPs within the same fund or fund house.

• What are the best dates to set up my SIPs?

 | Choose different dates within the month to spread out your investments. Avoid selecting consecutive dates (e.g., 1st, 2nd, 3rd or 21st, 22nd, 23rd). Instead, select dates from different weeks. The reason for avoiding consecutives days is to diversify investments from the ongoing trend.

Advantages of an Optimized SIP Strategy:

• Better Average Cost: More SIPs allow you to buy at different market levels, reducing the impact of market volatility

• Increased Returns: This method works particularly well in volatile or bearish markets.

• Better Diversification: It helps you enter the market at multiple points, enhancing the potential for gains.

Disadvantages:

• Increased Management: Managing multiple SIPs can become cumbersome.

• Market Conditions: This strategy may not yield significantly higher returns in a consistently bullish market.

• Minimum SIP Requirement: Some fund houses may raise the minimum SIP amount, which could affect your new SIP investment.

Let's evaluate this strategy by looking into real-time NAV for an uptrend:

I took TATA Digital India Fund Direct Plan-Growth Fund's NAV for analysis. You can check this fund's NAV from the CAMS site for the time frame 1 Aug 2024 to 30 Sep 2024.

TATA DIGITAL INDIA Direct-Growth NAV 01/Aug/24 to 30/Sep/24

Let's consider two persons, for example, A and B. Both are doing SIP in the same fund with 5000 INR per month. A is doing SIP on the 5th of every month but B is doing it in portions at 1000 INR each on the 2nd, 9th, 14th, 20th, and 26th of every month (this need not be the same dates or it is not a rule you can keep any dates of your wish). 

Please Note: The market always fluctuates, not always in an uptrend. Also in the below examples, the exact mentioned date won't be there. Please consider the investment dates or allotment dates are depend on the next working days of the market.

Person A SIP details and Average Price during the uptrend

Person B SIP details and Average Price during the uptrend

As we mentioned, For an uptrend or bullish market this SIP strategy didn't increase your returns than the usual one. But this will definitely increase your gains whenever the market is bearish or downtrend and you can use this method for long-term investment to maximize your returns.

Let's quickly evaluate this strategy with an example of a downtrend:

I took HDFC Nifty 5o Index Fund Growth NAV for analysis. You can check this fund's NAV from the CAMS site for the time frame 16 Sep 2024 to 16 Nov 2024.

HDFC Nifty50 Index Direct growth 16/Sep/24 to 14/Nov/24

Now consider the same two persons, A and B. Both are doing SIP in the same fund with 5000 INR per month. A is doing SIP on the 16th of every month but B is doing it in portions at 1000 INR each on the 3rd, 9th, 14th, 20th, and 26th of every month.

Person A SIP details and average price during the downtrend

Person B SIP details and average price during the downtrend

Now for the bearish market, this SIP strategy increased your returns than the usual one.

Is managing Multiple SIPs a Hassle? Here's a Smarter way to Boost your Mutual Fund Returns

Managing multiple SIPs and selecting different dates for each investment can be time-consuming and difficult. So, What's the alternative for boosting your mutual fund investment returns more effectively? 

The answer lies in a simple approach: investing in Direct plan - Growth index Funds and making investments every month whenever the index is down. You can split your fund and purchase when the index is down than the previous days. By focusing on these strategies, you can maximize your gains without the complexity of multiple SIPs.

The reason behind the index fund here is you can easily track it by just following the index. So you can decide yourself whether to purchase or not with the current NAV of the fund.

How to invest by tracking the index?

Example 1: I am investing in HDFC Nifty 50 Direct Plan Index fund. So I can easily track by watching the Nifty 50 index. If the index is down than previous days then I will invest in the fund by making a purchase.

Example 2: If I am investing in a Nifty SmallCap Index fund then I will follow the Nifty SmallCap Index movement and do the investment if necessary.

Rules to follow for investing by tracking the index?

Rule 1: You must invest the planned amount every month without fail.

Rule 2: Always follow your index and make the investments if necessary. We are not sure if the index will fall or go up by tomorrow. If you see the index is down than the previous days in the month then you can do your investments if needed.

Rule 3: No need to register SIP. But you need to push yourself to check the index regularly and do your investments.

Rule 4: Do your investments slowly and steadily by analyzing your ability. Always split your fund and invest. This will help you avoid market fluctuations that impact your portfolio.

Rule 5:  If you find the index is down than the previous days in the month, then follow the funds cut-off timings and make the purchases to avoid missing the possible price.

By implementing these strategies, you can maximize your returns from mutual fund investments, minimize risks, and stay on track to achieve your financial goals. Always remember to review your investments periodically and consult with a financial advisor if you need guidance. 

If you have any questions or need further clarification, feel free to ask in the comment section below!

Happy Investing!

Disclaimer: The information provided above is for knowledge and educational purposes only. thefinancefriend.in won't take any responsibility for the risk you have taken. Always consult with your financial advisor before making decisions for investments, as investments are subject to market risks.