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Principles of High Return in Mutual Fund Investments

Returns in Mutual Fund Investments

When you think of high returns of your financial investments in Mutual Fund investments, you have to think of high-risk factors too. You can never expect high returns without the probability of high risk. Mutual funds across the globe invest in several funds like equity funds, debt funds, bonds, stocks, etc. Let’s see what type of investment in a mutual fund gives you a high return and which among those provide you a secured return. Mutual Fund investments are goal-based investments and the return in it is dependent on several factors like your risk appetite, investment period, capitals, mutual funds’ portfolios, etc.

Low risk, secured return

Among the mutual fund investments, investments in large-cap funds are proven to be less volatile. Mutual funds in India invest in 100 best stocks in the market in such large-cap funds. As these companies are stable in their performance, they mostly offer a systematic return to their investors. Investors need to invest for a long-term in large-cap funds to receive the desired outcome. Most of the large companies run on debts; hence investments in large-cap funds are mostly done in equity funds. Though the return factor is not satisfactory in such a fund, people are interested to invest in large-cap funds for security. Almost all mutual fund companies give you the option to invest in large-cap funds. As mutual funds investments are subject to market risk, no investment is beyond the sphere of risk factors. Investors need to be prepared for moderate risk in such financial investments.

Medium Risk, Moderate Return

Investments in mid-cap funds offer you a comparatively better return possibility and it brings comparatively more risk than high-cap funds. Such investment is more volatile because stocks are chosen for these investments generally rank between 100-250 in terms of market capitalization. The stocks of such companies are less stable in their performance than the stocks of high cap funds but they can produce more return than the high cap funds. These funds are suitable for those who can invest their money at least for 3-4 years and can accept a moderate loss at the end.

High Risk, High Return

Small-cap funds are the most volatile funds for your investments in terms of return and risk factors. Mutual funds, which are investing in small-cap funds, are known to be high return mutual funds. Investors who like to take the risk for the largest amount of return can invest in small-cap funds in mutual funds. Mutual funds investments in such category select stocks that rank more than 250 in terms of market capitalization. These are the stocks of the newest companies; hence the whole profit or loss depends on the performance of such stocks in the present competitive market scenario. Small-cap funds are famous for their historic return. Almost all mutual funds offer you investments in small-cap funds because enthusiastic investors, who can take the risk for high return, are growing day by day. If you want to invest in small-cap funds, you have to be patient for at least 3-4 years for getting the desired return. But, before investing in such schemes, you need to be aware of the high-risk factors too.

To sum up

Mutual fund investments have high potentiality, but you cannot expect a big thing in a very short span of time. These are goal-based investments that need a longer time to get the desired outcome. The most important thing for an investor is patience. If you think of a secured return, investments in large-cap funds are suitable for you. If you can take risks for comparatively higher returns, invest in medium and small-cap funds. You can get all the information about the risk factors, market capitalizations, holdings, portfolio, etc online on different financial investments‘ websites. Even you can invest online in your suitable schemes of mutual funds. Study the market wisely, read all the documents carefully, and invest for at least 3-4 years for a handsome return in mutual funds. You can consult an AMFI registered Mutual Fund distributor for the best fund allocation for you.

How Behavioural Biases influence investor behaviour

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Have you ever felt the urgency to book profits on your investments but not so much to cut losses on the downside? Similarly, we have all made investments looking at the performance of a fund or the stock over last 1 year or 3 years ignoring other aspects such as the risk parameters, portfolio churn or the asset allocation.

The failure to think clearly, or a ‘cognitive error’ is a systematic deviation from logic. These errors in judgement are not occasional blurs, but rather routine mistakes, repeating patterns through generations and through centuries. Our mind has been tuned to think in a certain pattern overlooking the existence of other possibilities. The stock markets often capture these inefficiencies although they are suppose to be efficient with the advent of Algorithmic trading dominating majority of the volumes. The information is absorbed instantly and this has led to markets rising and falling synchronously across the globe.

So how do we avoid these cognitive errors of judgement? It is not easy to fool your mind which knows you better than yourself but it is not entirely impossible. It will require practice and looking at your decisions more objectively rather than emotionally. I have tried to list down some ways to avoid these biases in investing. This list is not exhaustive but is definitely a start:

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Trade less and Invest more – You will have to trade less and invest more because while trading you are up against the super computers and Algos who have better access to data and have analysed the information much more extensively. The odds are hugely stacked against you soby increasing your time horizon you would likely build wealth over time. Resist the urge to believe that your intuition and information is better than others in the market.

Avoid the feeling of regret – It happens with every one. You were confident that stock is fairly priced and its price is bound to skyrocket. It starts slipping down but you are all the more convinced that it is a great price to buy and hence you invest more. It comes down further but you still make yourself believe that you are in it for the long term and it is a value buy. You are trying to avoid the feeling of regret because as humans our mind is tuned to avoid that feeling. Best way is to avoid this error is to set rules for investments and you will stick by those rules. Make sure you do not let your emotions come in to play here.

Do not fall for predictions – Every day experts bombard us with predictions, but how reliable are they? A study conducted over a period of 10 years, 28361 predictions from 284 self-appointed professionals revealed that the experts faired only marginally better than a random forecast generator. So how can we verify if the prediction is worth considering? Firstly, consider the incentive behind the expert making those predictions. Is he an employee who is answerable for the predictions he makes? Secondly, consider the track record of his predictions. This should give you a fare idea on how one has fared over a period of time.

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Conclusion

Avoiding behavioural biases are not easy but they can be reduced by practice of objective thinking over a period of time. Be on the lookout for convenient details and happy endings. It is important to dwell more and look for details not easily available. Most importantly, keep the emotions out of investments as the legendary investor Warren Buffet said “ If you cannot control your emotions, you cannot control your money”

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