Invest for Consist Returns SIPs in funds with small expense ratios and consistent performance over a 3-5 year period hold greater promise for better returns. Investing in the stock markets can be tricky. Even when you invest through a mutual fund, the timing of your en try into the market has a huge bearing on the return. Sup pose you receive Rs 2 lakh as bonus from your employer, the stock markets are on an upswing, and you decide to park the entire sum in a high-performance equity fund. Subsequently, some bad news emerges that brings down the market by 40% over just a few weeks. Your fund also takes a hit, leaving you poorer by `80,000. Here, the choice of fund was not at fault, nor was your decision to invest in the stock market. What you should do: You should stagger your investment over a period of time. This way, you take a hit only on the initial investments. As the market begins to revive, you can invest the remaining sum. This will yield a healthy return on the overall investment once the market regains its previous level. SIPs, therefore, are a better option than a lump-sum investment. IGNORING FUND EXPENSES The very same investors who drive a hard bargain when it comes to buying the weekly supply of fruits and vegetables, often ignore costs when it comes to their mutual fund investments. For a small fee, also known as the expense ratio, you get access to a professionally managed portfolio of stocks chosen after rigorous research. But, even within the ambit of equity funds, costs vary. Expense ratio typically ranges between 2.5% and 3%. Over the long term, even a small difference in cost can make a considerable difference to your returns. Suppose that you invest `1 lakh each in two funds with gross return of 15% each. One of them gives a net return of 13% (expense ratio 2%) while the other gives a net return of 12.5% (expense ratio 2.5%). Over 30 years, the corpus generated by these funds will be `39,11,589 and `34,24,330 respectively--a difference of almost `5 lakh. Also, don't be under the impression that higher costs come with better return profile. A high ratio neither indicates nor assures a better performance. What you should do: Bear in mind the fund expenses when identifying good funds. There are enough good quality funds with low expense ratios. Another option is to buy index funds, which invest passively in the market, and charge a much lower expense ratio (around 1.5%). CHASING SHORT-TERM PERFORMANCE Past performance is one of the key criteria when it comes to identifying the right mutual fund. However, it has to be studied over a long period of time. Investors often get taken by oneyear returns that do not reflect the real picture. A fund may have delivered staggering returns over the past year, but a longer history may reveal heavy underperformance. Several funds that top the performance charts during a bull run tend to disappear from them, as soon as the market turns edgy. What you should do: To select a fund, you should look at its performance over the past 3-5 years, at least. Such a timeframe typically covers an entire market cycle, giving you a better insight into the ability of the fund to perform under different market conditions. Within this time-frame, you may also look at the fund's yearly performance. |
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