Moneycontrol » News » Mutual Funds » Advice

Foolproof strategies to maximize your profits

Published on Fri, Mar 24, 2006 at 12:11 | Source : Moneycontrol.com

Updated at Mon, Mar 27, 2006 at 12:10

Like this story, share it with millions of investors on M3

Share on Tumblr

At 6000 levels, a number of investors thought that the market had peaked. It didn't happen. At 7000 levels, a larger number of investors thought that the market was a balloon waiting to burst. It still didn't happen. At 8000, the skepticism found its way into the minds of several people and the markets almost felt like a roller coaster for a few days when the correction was steep. Now at 10,000 plus levels, people don't know what to think. There are indications that a few offshore 'India' funds have garnered huge money that will find its way into Indian stocks. At the same time, the run up in the markets has been too sharp for comfort. These are uncertain times indeed! (Read more - The Investors biggest Dilemma)

A large number of equity investors have sat outside the market, missing out on this rally completely. Listening to annualized returns of over 100 % now on hindsight has got the attention of a large number of them. Many are frantically trying to make good by putting their money into mutual funds, as is clearly evident from the huge mutual fund New Fund Offer, NFO, mobilizations. (Read more - New Fund Offer: 5 points to note before you invest) I think it's a good thing that Indian investors are finally seeing merit in investing into equity mutual funds - a superb investment option. In the mutual fund industry today, we are hoping that this is a sign that the under-investment of Indians in equities is finally undergoing correction. However, I hope that these aren't investors who are deploying ALL of their savings into the market at one go. And that these are patient investors not deploying their money in pursuit of overnight gain.

Here are a few tips that investors may want to look at while investing in such uncertain times:

Firstly, investors often find it difficult to decide on the right time to invest. There is a tendency to invest when everyone else is investing. However, the danger here is that investors may enter the market late and at higher prices. Mutual funds have devised a very sensible solution for investors to deal with the issue of timing - The Systematic Investment Plan (SIP). In a SIP, the investor buys units every month for a specific amount. As a result, his investments accumulate over time, and he is able to participate in the market regularly without worrying about the right timing. The state of the markets today makes the SIP an even more compelling investment proposition. (Read more - 7 reasons for SIP in a booming market)

A lot of investors seem to be substituting debt investments for equities purely because the debt markets have under delivered in the last two years, while the equity markets have been buoyant. If this is the reason for shifting into equities, then this reasoning is clearly flawed. Every investor must seek to practice asset allocation - whether equity or debt is determined after taking into account factors like investment horizon, individual financial goals, age, risk appetite etc. It would be a good idea to be in both and investors who can't determine the ideal asset mix, may want to see a financial planner. (Read more - Mutual Funds: Your best personal Portfolio Manager)

Investors should also a being taken in by fads as it could lead to investing in the right products at the wrong time. Besides, instead of investing all the funds into the one-magic product, investors should try to keep a balance. It is a good idea to have a core investment in a well diversified equity and debt fund and then add to it, the other flavours like sectoral funds, specialized funds and the like. Equity funds focusing on different sectors and styles have different levels of risk and return. It is important to have a balance in the choice of products. Among debt funds, the short-term funds would be less risky, but will have low returns. The long-term funds are more risky however they have the potential to earn higher returns. (Read more - Risk a little and Gain a whole lot)

Another important investment decision is how many funds should one invest in. Too little is risky, and too many is unwieldy. It is a good approach to spread investments across 3-4 fund houses, and buy the products of large, well known funds, with a reputation of good management and sound investment processes. (Read more - Cutting through the MF jargon to pick the right fund)

Finally, investors have also to decide upon how often they should review a mutual fund portfolio. Most mutual funds publish their portfolios every month. A review one every six months should be adequate for the investor. Investors can check for returns and performance of a fund in comparison with its benchmark (published in the report itself) to judge how well a fund is doing. It may not be necessary to churn one's investments, unless the performance turns out to be below expectations or if the investor's need has undergone a change. Staying invested pays better than churning too often.

The author is Nilesh Shah, Chief Investment Officer, Prudential ICICI AMC. (The views expressed in the article are personal)

More from Experts...

For more columns by Experts click here