Mutual Fund Investing: 3 Strategies To Optimise Your Returns

Millions of people invest in mutual funds, but not everyone earns the same kind of returns. In the same time period, some investors make double-digit returns while others end up with low single-digit gains. However all investors wish to optimise their returns as per their needs and get higher returns for their investment.

While there’s no guaranteed way of achieving high returns. Strategically investing your money can increase your chances of getting better returns. Here’s a look at some strategies you can consider adopting while investing in mutual funds which can optimise your returns as per your needs.

Don’t Chase the Best Mutual Funds: This is the most common mistake among new investors– chasing last year’s top-performing funds. Many investors simply pick funds that delivered the highest returns in the recent past. Some even keep shuffling or adding new top performers every year, hoping to earn higher returns. But, over time, they end up with 10,15 or even 20 schemes, which is an unnecessarily bloated and difficult-to-track portfolio. The truth is, top-performing funds keep changing every year, and chasing them does not guarantee better results. By the time you switch, the outperformance is usually over, causing you to miss compounding and end up with lower returns.

At Outlook Money, we did some math to see if chasing top performing mutual funds actually work. We assumed an investor put Rs 1 lakh each into the top three performers of 2013. At the end of 2014, the investor redeemed the amount and again invested in the top performers of 2014. This process continued every year for 10 years until 2023.

After a decade, we compared this with investing in the Nifty 500 Index. So, Rs 3 lakh invested by chasing annual top performers grew to Rs 11.21 lakh, while the same amount in the Nifty 500 became Rs 11.15 lakh.

Thus, chasing top performers did not create any meaningful extra wealth. Instead, investors should look for schemes that have delivered consistent performance over long periods.

Opt for Direct Plan instead of Regular Plan in Mutual Funds: If you started a Rs 10,000 monthly SIP in an average performing flexi cap fund seven years ago, the regular plan (at 16.43 per cent returns) would have given you a corpus worth Rs 15.08 lakh today. The direct plan of the same fund, at 17.49 per cent returns, however, would have grown to Rs 15.67 lakh. The difference comes from the expense ratio.

Expense ratio is what mutual funds charge to manage your money. Regular plans involve intermediaries, so they carry higher expenses than direct plans. While there are exceptions, the gap between direct and regular expense ratios in equity schemes is typically 0.7 per cent to 1 per cent. Over time, this difference compounds into a sizable impact on your returns. That’s why direct plans tend to deliver higher long-term returns.

Avoid Negative Returns in Mutual Funds: If your Rs 100 investment falls to Rs 75, it needs to rise by 33 per cent to break even. If it falls to Rs 50, it requires a 100 per cent jump to get back to Rs 100. This shows why avoiding deep negative returns matters.

Here’s an example:

Fund A delivers 100 per cent returns in one year but loses 60 per cent the next year.

Fund B delivers 80 per cent in the first year and falls 40 per cent in the next.

If you only look at high returns, you might pick Fund A. But the math tells a different story.

Rs 1 lakh in Fund A becomes Rs 80,000, while in Fund B it becomes Rs 1,08,000. So, protecting the downside is just as important as capturing big upsides. 

Going back to basics, to avoid negative returns, stick to investing in consistent funds for a long time. As per historical data, the longer you stay invested in equity mutual funds, the lower your chances of negative returns are. This happens because As the investing horizon increases, short-term market volatility evens out, reducing the impact of temporary crashes or corrections on your overall returns.

According to a study conducted by FundsIndia, the chances of negative returns become zero if the investment horizon is seven years or higher. This study was based on the historical performance of Nifty 50 since its launch in June 1999. Nifty 50 is an index that represents the largest 50 companies of the country.