Do Not Judge Your Mutual Fund Investments Only On Returns

Investment is one of the keystones of good financial planning. Money which is parked in your account becomes stagnant and loses value due to the phenomenon of inflation. Hence it is prudent to invest your money in various financial securities, the most popular of which are mutual funds.When you invest your surplus funds, you give them a chance to grow and thus in the long term, you’ll find that your funds have grown to a sizable corpus and kept pace with growing inflation.However, when investing through mutual funds, whether it is in equity funds, debt funds, or both, many investors make the mistake of constantly doubting their investment because of fluctuating returns. We all have the habit of always keeping our eye on the returns, and if they drop, we immediately start worrying and think of switching our funds.This article focuses on why this is not a good practice and why we must never judge our mutual fund investment only on returns. In a diverse portfolio, all funds have their own purpose, and they must be thought of keeping their goals in mind.Let us look at some of the things that an investor must consider when they get impatient with their investment portfolio and want to switch funds just because they’re not happy with the returns.

1. Debt funds are funds that are invested in fixed income securities like government bonds and money market instruments. Unlike equity funds, debt funds are less volatile but also provide lower but consistent returns. Debt funds are ideal if you want to park an emergency fund or fulfill a short or medium term financial goal.They provide stability and safety to a portfolio, and they shall keep doing that as long as you’re invested. To expect debt funds to shoot through the roof with returns is unrealistic, and one need not switch their funds to equity after seeing low returns on debt funds.The only time when you can consider switching your debt fund investments to equity is if your original short or medium term financial needs are not valid any longer. Even then, it is wise to keep some emergency fund invested in debt funds. Thus, debt funds are never meant for maximising returns and one must look at them accordingly.
2. You may have also invested in balanced funds, which sometimes may not show as high returns as you’re expecting. But again, balanced funds exist for a specific purpose. They are a combination of equity and debt funds that have a specific debt: equity allocation during market cycles. Thus, when the markets are high, shares are sold and when the markets are low shares are bought. This enables balanced funds to stabilize your portfolio.When returns are high, one must make the most of it, and balanced funds do exactly that. A portion of the profits from the equity aspect are switched to debt funds and thus they’re preserved from any future equity fluctuations. A balanced fund does this automatically and thus it should be a prominent part of your portfolio.
3. Just like balanced funds, some part of your portfolio must also consist of large cap funds. Large Cap funds invest in the top 100 companies of the country. These are large, stable companies that have seen multiple market cycles and are always less risky than small and mid-sized companies.In a bull run, where small and mid cap funds show excellent returns, large cap funds may show lower returns. But these funds are quite stable and one must not worry when that happens. When markets go down, it is these large cap funds that outperform small and mid cap funds and provide stability to your portfolio.Only when you have no mid cap investment in your portfolio should you consider switching a portion of your large cap investment to midcap funds.
4. A fixed eye only on returns will never show you the whole picture. This is because at a given time in the market cycle, there is always one fund which outperforms all others. Sometimes when equity funds are giving low or negative returns, debt funds do well and you may find yourself attracted to them. When the market is volatile, the stability of large cap and balanced funds come to the fore and outperform small and mid cap funds. Similarly, in a bull run, mid cap funds fare better than other funds.

The takeaway from all this is that your portfolio must have a balanced share of all of the above types of funds. This ensures that you get good returns consistently because when one investment in your portfolio is not doing well, the other balances it out and vice versa.

Thus, in order to make the most of your investment, your focus should not be on maximising returns but on creating a diversified portfolio that can give you consistent returns so that you can fulfill your goals. Investment should always be goal oriented and never returns oriented. You must plan your various financial goals first, then categorise them into short term, medium term and long term.You can then allocate your portfolios to each of your goals so that the advantages of different funds correspond to your financial goals. Every penny that you invest must contribute in some way to your future financial goals and investing with this attitude can help you do just that.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.