Most successful mutual fund investments come with a solid goal and a game plan to achieve it. Some investors may try to appreciate their investment with little risk, while others try to maximise their growth regardless of the risk. The goal here usually depends on your risk tolerance.
There are plenty of ways to stay conservative here. For instance, you could look for mutual funds online that primarily invest in debt. But how do you invest when you want to maximise your capital appreciation through mutual fund investments?
Read on to explore some methods you can use to try and achieve maximum returns.
Equities versus debt
Before exploring ways to maximise mutual fund returns, it is important to understand the characteristics of two of the most common securities that mutual fund portfolios contain – equities and debt.
Equities are shares of companies. Investing in equities is known to have a higher potential for growth. At the same time, they come with a higher risk as well.
On the other hand, debt investments are considered safer comparatively. But their growth potential tends to be lesser.
An important thing to understand here is that different equity and debt instruments have varying risk and return potential levels.
Things to consider to maximise wealth creation
Now that you understand the varying characteristics of equities and debt, take a look at three methods you can use to try and maximise your capital appreciation.
- Choose a high-risk option
As discussed above, high-risk options are known to have higher return potential as well. To make use of this, you may dedicate more space to securities like equities in your portfolio. This can ensure that you have the highest chance of growth.At the same time, remember that diversification is also important, and don’t invest in one security alone. Rather, try and make up to 65% to 70% of the investments in the portfolio in high-risk options if your risk tolerance allows.
2. Target a sector that shows potential
One way to ensure that your equity portfolio choices have the best chance of growth is by targeting a sector that is expected to perform well. Not all sectors perform similarly at all times. Different sectors will have different time periods where they tend to outperform other sectors.
For instance, the hotel and tourism sectors showed bullish signs once COVID-19 restrictions were lifted worldwide. You could do your research to find out similar opportunities and invest in companies in the sector that shows the most potential.
- Try investing in the index
If historical data is to be believed, index funds have always outperformed short-term fluctuations in the long term. The growth of Sensex and Nifty are examples of this. Both indices have grown more than 70% in the last five years as of November 2022. If you are an investor who is looking for not-so-aggressive options like the two above, you may try to invest in indices to try and maximise your chances for growth.
You can invest in them through index mutual funds. They are mutual funds that track an index as is.
The above methods could help you gain maximum returns from mutual fund investments. But at the same time, it is important to ensure that you are not blindly following returns alone. Instead, the best approach is to figure out your risk tolerance and apply these above methods if your risk appetite allows for the same.