1) Invest through SIP:
Best way to invest in mutual funds is investing through SIP every month. Each small amount invested through mutual fund every month would create a good amount over a period of time. Do you know that Rs 5,000 per month invested through SIP in equity fund with an annualized returns of 12% can yield you Rs 25 Lakhs in 15 years.
2) Invest based on risk appetite:
High risk appetite investors should go more towards equity funds, moderate risk appetite investors should be investing in hybrid funds (Equity + debt combination) and low risk appetite investors should be investing more in debt related funds. E.g. Reliance Small Cap fund, which is for high risk investors gave 140% returns in 1 year. This does not mean you would get such returns every year. But investing based on your risk style would help you to get high returns.
3) Invest in various categories of funds:
Large cap, mid-cap and small-cap funds perform differently over a period of time in various market scenarios. Hence, investing in various categories of such funds would help you to get maximum returns. E.g. Franklin India Smaller companies fund focuses on potential small companies. This fund has outperformed and given 100% returns in last 1 year and annualized returns of 24% in last 5 years. Mid-cap funds may not provide such returns every year. But investing in such mid-cap fund would help you to get maximum return over a period of time.
4) Invest in sectors that are expected to outperform:
There are high risk investors who are willing to take risks and invest in high risk funds like sector funds. Such investors can consider sectors that are likely to out-perform in the near future and invest in such funds. E.g. Infrastructure sector, though has reached some peak, is still expected to outperform in next 3 to 5 years. Considering Infra funds or banking funds (which would indirectly boost infra sector by way of funding) for short term to medium term of 3 to 5 years would be a best bet.
5) Invest in funds based on your financial goal:
One of the area where investors fail to understand about mutual funds is they invest in wrong funds or misunderstand about the basic principle that they need to hold for the long term. Don’t invest just because a mutual fund scheme has given 100% returns in one year. You should know that such fund could erode your capital if there is market crash. Invest in mutual funds based on your financial goal. E.g. You want to save money of Rs 30 Lakhs for your child foreign education in next 15 years. If you can invest Rs 6,000 per month in well diversified mutual fund portfolio for 15 years, you can easily achieve this goal. Hence, your investment should always be based on a pre-defined goal to achieve best results.
6) Use STP for lump sum mutual fund investments:
One of the biggest mistake investor would do is investing a lump sum in equity funds. This may be a good strategy during market corrections. However, when markets are reaching peak or when you do not know its direction, the best way to invest a lump sum in mutual funds is invest in short term debt funds and do STP (Systematic Transfer Plan) to equity funds over a period of time. This is nothing but you are doing SIP to equity fund from debt fund thereby reducing risk of investing a lump sum in mutual fund.
Concluding remarks:
Following these simple principles can help you to maximize returns in mutual funds. Stop waiting for market correction and start investing in mutual funds through SIP now.