Every investor who invests in mutual funds does so to grow their wealth. The higher the returns, the more benefits one receives. Besides, you may also want to achieve profitability in a short time as possible. In reality, the returns depend on a lot of factors, including the investment instruments you pick, your risk appetite, the investment horizon and more.
Through this article, we understand how to view mutual fund returns.
Why do we need returns?
The predominant reason for wanting to amass returns is, so you have enough savings for a financially stable future. The main aim is to earn adequate gains to equate inflation, if not beat them.
When it comes to investing for less than five years, i.e. short-term, we consciously look for funds that can offer high returns with high-to-moderate risk, i.e. debt funds. The interest rates of fixed-income instruments depend on the interest rates set by the RBI. Thus, returns on debt instruments and fixed deposits usually tend to be 1 or 2 points above the inflation rate. Most investors often earn less than the inflation rate because the interest income also gets taxed.
However, for long-term investments, inflation has a pivotal role to play in your savings. You invest in products after carefully analysing your options and studying the returns/performance of funds over the last few years.
Two critical factors to consider for achieving expected returns
- Take inflation into account
As mentioned above, if you are looking to stay invested for a long-term horizon, it is a wise idea to factor in inflation in all your calculations to know your real returns. Typically, experts advise investing in equity funds if you have a long-term horizon. For beginner investors who are not aware of what is equity fund, these are mutual funds that primarily invest in stocks of companies to generate higher yields.
- Assess your investment capacity
Determine the final corpus amount you require by the end of your investment horizon and the goal you wish to achieve with it. For example, you are aiming to save Rs.25 lakhs for your child’s education in the next 7 to 10 years. Decide how much you can start investing today and for how long you can keep investing. You may also want to consider the risks you are willing to take to earn the expected returns on your investments.
Before you invest in mutual funds online, understand your individual financial goals over a specified time horizon. Once you establish this information, you can know the expected returns from your investments you wish to achieve. Also, monitor the performance of the mutual fund investment at regular intervals to identify if it is meeting your financial objectives. Accordingly, you can keep tweaking your mutual fund portfolio by investing in different types of mutual funds that align with your investment goals.