There is no such thing as a one-size-fits-all solution. The investment styles and weights within each strategy can alter. Gone are the days when investors put together portfolios on the spur of the moment, with no clear understanding of the investment plan. Investors have realised that combining the correct investment style and plan boosts their chances of success dramatically. Having said that, here are some of the popular strategies for mutual fund investment.
6 Popular Strategies To Invest In Mutual Funds
Create a Diversified Portfolio
For investments to thrive, a thorough and well-thought-out asset allocation is required. It is not a good idea to put all of your money into equity securities. Your investment portfolio should be well-balanced, with funds spread throughout a variety of asset classes, including debt. Concentrating your investments in one asset class raises the risk: if a certain sector or fund, or the equities or debt market as a whole, experiences a downturn, your entire investment could be impacted, and your returns may not be as planned. Diversification spreads risk and reduces shocks caused by the over-concentration of money in one asset class.
Dynamic Asset Allocation
If you wish to invest in equity but have a low to moderate risk tolerance, consider investing in balanced funds with dynamic asset allocation. This type of fund adjusts the asset allocation dynamically based on market conditions. When equities appear to be overvalued, such funds reduce their stock exposure and raise their debt investments. When markets are oversold, these funds raise their equity investments while reducing their debt exposure. This type of investing strategy allows investors to benefit from both debt and equity, and it often provides consistent returns regardless of market conditions.
Know When To Exit
It is critical for an investor to know when to withdraw from a mutual fund. Unfortunately, when the market goes into a bear market, many investors make the mistake of selling mutual funds, which is a bad idea and not a good plan. The fund managers who are capable of doing so know how to take a step back from the bearish market trend and capitalise on it. So when should an investor exit? Investors must exit when they have achieved their investment goals with their schemes. They can exit when the investment objective of the scheme has changed and the new objective does not match your investment goals.
Value Investing is a strategy for selecting companies with strong long-term prospects but discounted stock prices. Value fund portfolios look for equities that the market undervalues and whose prices don’t reflect their businesses’ fundamentals. Investing in such equities at a discount can pay off handsomely in the long run. Value investing entails an in-depth analysis of a company’s financials as well as the industry in which it operates. Value mutual funds don’t follow the crowd; instead, they make decisions that are often at odds with market sentiment.
Stay Committed For a Longer Term
Mutual funds aren’t recognized for being get-rich-quick scams. Instead, to get the best returns, an investor must consider a long-term investing horizon. Equity-oriented mutual funds are best for investors intending to invest for five years or longer because equity markets improve in the long run while being volatile in the short run, which can result in profit or loss. To keep their portfolio liquid, they should combine stock investments with short-term investment holdings. As a result, investing in debt funds allows an individual to address immediate cash needs without compromising long-term prospects for larger returns.
Know the Taxation
Knowing the tax on new investments and withdrawals is essential to each investor. While ELSS provides a tax deduction on investments, capital gains are charged on the redemption of funds. Capital gains are charged on the basis of the period of holding. Needless to say, even a day’s delay in withdrawal could mean a great difference in tax rates. If you do not declare these gains in the ITR then you will receive an Income Tax Notice followed by the hassle of revised returns and so on. Ultimately, you might have to pay excess tax and penalties. Hence, know the basics before investing and redeeming.