You must have heard that ‘Mutual Funds sahi hai…’ and that’s in a way right. Though investing in mutual funds is right option to earn higher returns over other asset classes, but it is not always true. Please study following scenarios where your investments might get ruined, and your financial health may be pushed to back foot.
The factors affecting your MF returns.
1) Simple scenario of market crashing drastically –
If you go on investing in MFs via SIP or lumpsum methods and you accumulate good corpus including returns and then there is a sudden crash in the market like in 2008-09 (Lehman Bros.), 2013-14 or 2020-21(Corona). All such crashes in the market will eat up all the or at least majority of the returns and sometimes even principal. And then you might blame your fate or external factors who made market crash.
2) Panic Crash in the market –
Like in 2024 electoral results in largest democracy in the world, India; market showed drastic and panic movement of over -8 to -10% in a single day and then 5% for next 2 to 3 days, such scenarios may break your morale of investments and you again blame the concerned parties. No doubt Government of India, especially supreme court has probed into the scenario and asked the regulatory body SEBI to identify who were the people responsible for panic sale. E.g. it is said that one of the NDA (National Democratic Alliance) party leader’s family got 1300crores profit in a single day. May be that’s rumor but when an apex legal body of any country asks for investigation, there cannot be smoke without fire. Let others earn but you should not loose.
3) Inconsistent and Poor returns –
While selecting fund that may be performing well when you started investing in, you may feel, many-a-times, that you haven’t earned as much as your friends or relatives have earned through MFs. This is because of many reasons. One of the reasons could be, you did not monitor the returns and its consistency. Once you get to know a fund is not performing, either because of hopes, laziness, ignorance or blind faith, you do not change your selection of fund/s. Unnecessary, you continue with the same fund/s in the hope that it will perform better in coming months/year. They are not your relatives, you got to remember that.
4) Exit Load –
MF fund may apply exit loads, meaning if you exit the fund before certain time period prescribed in the offer document, then the MF house will charge certain %of the fund. Generally, this time period is of 365 days/12months and exit load is 1% to 2%. You may feel that once 365 days are over, there will not be any exit load, but you may have to rethink. Meaning suppose you invest Rs. 5000/- every month for next one year and expect the expense ratio will be zero after a year, it does not work that way. First 5000 will have 12 months period, next SIP will have next 12 months’ time period, so on and so forth. In that way, if you are withdrawing the entire 60000/- Rs and any returns thereon, you may to pay expense ratio on entire amount only except Rs5000 and any return there on.
5) High Expense ratio –
High expense ratio will eat up as high as up to 2 to 3% of your returns. So, select MF for investments wisely. There is no benchmark as such on what lower expense ratio we should select, but generally less than 1.5% could prove beneficial in long run.
Measures to increase the returns
1) Book the profits periodically –
- If you won’t book a profit timely you may lose the well-earned returns. Question is when will you book profits? Generally, set the target earning percentage and book profits. Important thing is you redeem the MF units equivalent to or little higher than exact profit you have earned. Keep the originally invested principle amount intact. Then again start investing the booked profit in different MF or asset type. This way you can hold your profit tightly even if market dips 10% to 15% (i.e. in most strange and devastating cases).
Now question is where you can park the money earned from booking the profit. Either hold for right opportunity to invest in MF and/or in market or hold some part as liquid cash or repay debts or invest in real estate or fixed income. Good way, if not the best way, is to restart the same investment after booking profit but in different but better MF for easy tracking.
2) MF returns are not always the highest –
Majority CA, MBA, working professionals think that investing MF can make you earn the highest returns. But I can shake this thought well enough. No doubt MF returns are good in the industry but not the best. Then what other investment can make you earn even higher returns? That’s business. If you start any business and try to establish it in the market, it may make you earn as high as 50% or 100% or even higher returns. Please check out margins in food industry, industrial products, consumer staples and discretionary product selling or manufacturing, clothing industry, interior decoration; just to name few. Simple a Tea stall can make you earn over 50,000 Rs. in a month (this is even higher depending on the business location). Now if you are doing a job, like most of us are doing it, it is the best option to invest in the side income generating business and then slowly once you start earning enough, you can quit the job and concentrate on the business. But if you continue both, that is also advisable.
3) Real estate investments –
Investment in real estate requires significantly high amount, it is highly illiquid, costly (interest cost) and low yielding (rental income) however; the value of real estate cannot fall below the purchase price, unless it is bought at such location or at such high price that it will be difficult to generate the returns. Over the period, you can repay debts earned from the profits of MF and self-funding to reduce interest cost. For more details on Real Estate investments, please follow another blog, ‘How to Make Real Estate Investments Profitable’
4) Monitor your investment returns –
Be professional while accepting the returns and performance of the funds. Please read the offer document carefully before investing. By carefully, it means that check the fund managers’ track record, historical returns for analysis purpose, check 1-3-5-10 years and since inception returns, entry load, exit load, expense ratio, investment category (Moderate risky, risky or highly risky investments etc.). Most important is check your goal and already imagine the need of money you may have in future. E.g. if I want to buy a car (not ideal example though) which requires 15,00,000 Rs. at some target date, then think of your risk-taking ability and then select appropriate fund. Do not randomly invest in any fund just because your friend is doing so. You may also want to take experts advise.
5) Experts Advise –
Do feel low while taking experts advise. You are also expert in some other field, where your manager, colleagues, clients take advise from you and you prove you advises right. Similarly, experts in MF markets may make you take right decision and at right time. This will not just give you higher returns, but it will also give you reliability on your decisions and lower headache. They will charge you or they will ask to invest through them, never mind that. You also charge your employer; client and they willingly pay you because they know that they will get really good value out of your work. Don’t hesitate to pay for an expert advises.
6) Be Opportunist –
As soon as you come to know an asset price of any investible asset has gone down, that could be a great opportunity to invest in. However, be cautious of the prices going further down. Best way is to check ‘V’ curve in the asset pricing chart. Meaning let the price go down fully and reverse it so that it will start creating English letter ‘V’ like recovery. Once it starts momentum invest in it. Remember, you invest only when it starts to reverse the price action and most importantly invest in smaller amount, because you never know the pries may further slip down after showing some recovery. So, never invest all amount at one go. Also never invest all amount in asset i.e. never put all your eggs in one basket. Also, being opportunist does not mean averaging out the asset prices always. Sometime, averaging out will require more amount, in the same assets and it may further weaken the performance of an asset. So, try to refrain from averaging out in weaker assets. If it is a good stock according to you, then it is ok sometimes to add more asset to take an advantage of fallen angel.
7) Save yourself from market rumors or Tips
If you don’t have idea of investing, take experts advises rather than being reliant on rumors and tips or being over excited by any news. E.g. in 2024 electoral results in India – the largest democracy in the world, almost many people expected that BJP (Current ‘PM’ Narendra Modi’s party alliance) will win the election single handed with a vast majority by getting more than 272 plus seats required for majority to form the government. Even Market was full of such rumors. Majority people bought ‘Call’ options and made their positions in the market by buying stocks. But on the result day, all rumors proved wrong, and BJP (Narendra Mody’s party) could not even cross 240 seats. The market showed the reaction and crashed itself by 2000 points (more than 8%) in a single day. All MFs, position holders, Call option holders lost their money. That amount was over few hundreds of billions in a single day. The date of crash was 4th June 2024. History witnesses a great loss for the investors. No doubt a probe into this price action is being investigated and the orders to do so have been given by supreme court of India. But the result of market crash is in front of everyone.
Please think all the points mentioned above and act on it. This will not only increase the returns but help you to hold your much awaited hard-earned profit. Let us know in the comment section below, what other things are in your mind that will increase the returns. Please also like and share the blog.
