The Indian Mutual Fund (MF) industry has been on a meteoric rise. With AUMs skyrocketing over the past decade, it is poised to hit a staggering Rs 100 lakh crore mark in as early as 2 to 3 years. The Indian MF industry’s AUM has surged from Rs 50 lakh crore in December 2023 to Rs 61.16 lakh crore in just six months. This unprecedented growth is a testament to the increasing popularity of mutual funds as a preferred investment avenue for Indian investors.
A crucial question, though, is raised by this expansion: How can investors make sense of the confusing mutual fund market and maximise their gains? This blog will help you fully capitalise on this booming market by going over the key factors to consider when investing in mutual funds.
The Pitfalls of Past Performance
Is the best course of action really to pursue short-term performance? The lure of quick and easy profits is a common trap that many investors fall for. Yes, past performance can be a useful indicator, but it is certainly far from guaranteeing future success. Given that higher returns come with higher risks, short-term fluctuations—which are an inherent feature of the cyclical financial market—can be incredibly misleading. A fund that has performed exceptionally well in the recent past may not continue to do so. For example, while tech-related sector stocks have performed well recently, MFs now view them as a contra bet because the industry does not currently have many tailwinds. Hence, chasing recent performance can lead to impulsive decisions that may not align with your long-term investment goals.
Looking Beyond Short-Term Fluctuations
While short-term performance can be enticing, a truly smart investment strategy necessitates a long-term perspective. This is why calculating Rolling Returns offers a more accurate picture of a fund’s performance over time, considering its returns across various market conditions. To put it simply, rolling returns are computed by taking a fund’s performance over a given period of time, moving that period forward by one day, and then calculating the return once more. A more thorough picture of a fund’s performance over time is provided by repeating this process several times. One advantage of analysing any investment through rolling returns is that it helps identify funds that have consistently delivered returns, which is through both bull and bear markets. This method offers a more trustworthy evaluation of a fund’s long-term potential while reducing the effects of short-term volatility.
Diversification: A Shield Against Risk
One of the main tenets of investing is diversification, which is distributing your holdings among a range of fund types and asset classes. You can potentially lessen market fluctuations and limit your exposure to certain risks by doing this. Refrain from putting all of your money into a single sectoral or thematic fund and making large investments in it. If the market moves against you, a concentrated bet can result in large losses. Put more effort into creating a well-diversified portfolio that fits your investing objectives and risk tolerance. Remember that diversification is only one aspect of investing; you also need to take into account the underlying principles of each fund, including its investment philosophy, portfolio diversification, and the fund manager’s history.
Financial Guidance Has Value
Seeking advice from a qualified financial advisor can be a wise decision, providing you with invaluable guidance as you navigate your investment journey. They can offer customised guidance based on your particular financial objectives and risk appetite. Yet, whether you decide to work with a professional advisor, undertake in-depth research on your own, or combine the two approaches, it is crucial to identify the relevant information sources that help you achieve your needs and investment goals. By educating yourself and getting guidance from reliable sources, you can keep up with market trends. Well-informed decisions will elevate your chances of making successful long-term investment choices.
