October 12, 2009
Boost Your Portfolio’s Returns
When you opt for investing in Mutual Funds you naturally want to play it safe and hand over investment decisions to an expert. What many people do not realize is that there are ways through which you can boost your returns by choosing the right Mutual Fund at the right time.
Basically, there are two types of investors in Mutual Funds. You can either be a passive investor who stays invested long term in a particular Mutual Fund or a proactive investor who switches between Mutual Funds to maximize profits.
The first mantra of maximizing profits, however, is diversification. This is the lesson most people learned after the crash of the dot-com boom.
Actually, even before you zero in on a Mutual Fund you have to first assess your risk appetite. You naturally want to protect your capital but remember that there can be no profit without an element of risk, howsoever small it may be. While diversified funds offer greater protection of your capital there is another way through which you can diversify your investment by choosing sector funds. This allows you to tap the growth potential according to the emerging trends.
Diversified Mutual Funds tend to pay more attention to the percentage of assets allocated to a particular asset class rather than divisions within it. It is better explained this way. The asset management company has declared its diversification before the launch of the fund. Once the investible amount has been allocated it is less likely to switch between sectors.
Look at it this way. Secular trends keep on emerging from time to time. There may be a case of decisions taken by major corporations to increase or reduce capital spending or increase in consumer spending due to fall in interest rates. The idea is to maximize your profits by grabbing the opportunity provided by the trends that keep on emerging from time to time.
While diversification is the name of the game when it comes to maximizing profits, look beyond diversified funds as well. Allocate a small percentage of your investible funds to sector funds and actively rotate between sectors to increase the profit potential. For example, if a diversified fund gives you an annual return of 10% you can only expect a minor variation on yearly basis. On the other hand, there are times when sector specific changes in the market outlook can provide two to three times the returns you are getting from a diversified fund. If you have allocated a part of your funds for sector funds you are better placed to switch between sectors.
To maximize your portfolio returns take the proactive approach and switch between sector funds. While this is an effective strategy, as a proactive investor you have to understand the dynamics of the overall market as well as individual sectors so as to know which sectors to invest in and the ones to avoid. While switching between sectors you also have to consider the entry load, if any.