Investing in mutual funds is not just about socking your money every month through systematic investment plans. You also have to make sure you invest in mutual funds appropriately in the right schemes, sectors and categories of funds at the right time – and in the right way. Every successful strategy has a game plan in place – and in mutual funds it’s even more important to have one. Otherwise, your returns can be average or even poor.
STEP ONE: DO MUTUAL FUND SIPS ONLY IF YOU CAN WAIT
One common method to invest in mutual funds is through systematic investment plans or SIPs.
But now, when investing through SIPs, ensure that you are doing it only for the long haul.
With stock markets near their all-time highs, systematic investment plans are not going to make money in the near term. So if you are starting a SIP for just a year or so, remember it will be buying stocks at really high levels.
Every subsequent investment will be buying stocks at higher levels, if the stock market is going up. Essentially, with a SIP you are averaging your buying price. But when the markets are going up, you are averages will only go higher. Because of this your returns will average down.
So, unless you are willing to wager on the long haul i.e ensure that you continue your SIPs for the extra-long haul of three years and more where you get an opportunity to invest in a sideways or low-trending markets, your SIP strategy will always have something amiss.
STEP TWO: TIME MUTUAL FUNDS FOR BETTER RESULTS
Pay attention to market cycles. Equities tend to move in cycles whether it is the broader markets, or individual sectors such as pharma, real estate, infrastructure, consumption and so on. Mid- and small-caps also move in cycles.
One of the keys to make better returns in the market is to ‘buy’ when the cycle dips and ‘sell’ when the cycle turns.
Do your research. Find out the companies or sectors where the cycle is at its nadir and where the cycle is turning for the better. If you are able to see the financial history and how various sectors have performed, you will try to get your investments in at the low side.
If you don’t understand the information, have a conversation with a financial advisor on how to invest in sectors.
STEP THREE: LUMPSUMS ARE BETTER DONE ON DIPS
Mutual fund investors often make lumpsum investments whenever they have surplus funds. But you could get unnerved every time there is a market correction after you make your lumpsum investment.
Hence, a better strategy is to buy into your favourite funds every time there is a, say, ‘five percent correction.’ That is, whenever stock markets take a dip say of five percent, you invest a part of your investible surplus into mutual funds. Essentially, this calls for having lots of investible surplus in your cash or savings account or in liquid funds.
It also calls for you to list one-two funds that are a part of your core portfolio for the long haul.
Every time the market dips five percent, you switch says 20 percent of your funds in equity funds. This way you will get more bang for the buck, proverbially speaking. That is you will get more units for the same amount for similar investments. You will be averaging your buying at lower levels, when the rest of the market is averaging higher.
Investing in mutual funds is about investing time and, of course, money. You need to invest in mutual funds the right way. Once you do these, you ought to get your mutual fund game higher, and returns even better.
