5 Ways to Boost Portfolio Returns With Mutual Funds
How to Squeeze Out Every Possible Ounce of Return on Your Funds
Getting the best returns out of mutual funds isn't just a matter of finding and buying the best funds. Many investors don't realize that higher returns are more within their control than if they were to take on more market risk. Instead of searching for the top-performing funds, which doesn't always lead to top performance in the future, investors can follow five simple ways of maximizing returns.
So without further ado, here are five ways to boost mutual fund portfolio returns.
1. Use No-Load Funds
When it comes to keeping costs down, it should go without saying that no-load funds are better than load funds. And the same goes for performance. With all other things being equal, the fund that does not charge a load will keep more money in the pockets of investors than the ones that charge loads.
For example, if a particular fund has more than one share class, where one has a front-load of 5% and the other share class has no load, and the investor has $10,000 to invest, the front-load fund will charge $500 up front to get into the fund. Therefore, with the front-load fund, an investor begins investing with $9,500. But the investor would begin investing with all $10,000 in the no-load fund.
2. Use Index Funds
When using index funds, boosting returns is similar to reason number one: By keeping costs low, investors can keep more of their money, thereby boosting total returns in the long run. But the advantages of index funds don't stop with lower costs -- these passively managed funds also eliminate something called manager risk, which is the risk that an actively-managed mutual fund will produce sub-par returns compared to a benchmark index, such as the S&P 500 Index, due to poor management decisions.
With all do respect to actively-managed funds, they are one of the few ways to "beat the market" but the added risk that the fund manager will make poor decisions or have unfortunate timing for an extended period is always a part of investing in these funds. However, index funds don't carry the same manager risk, although they will still have market risk.
In summary, index funds don't always beat actively-managed funds but their low costs and lower relative market risk make them smarter choices for better long-term performance.
3. Dollar-Cost Average Into Your Mutual Funds
Dollar-cost averaging (DCA) is an investment strategy that implements the regular and periodic purchasing of investment shares. The strategic value of DCA is to reduce the overall cost per share of the investment(s). Additionally, most DCA strategies are established with an automatic purchasing schedule. An example includes the regular purchase of mutual funds in a 401(k) plan. This automation removes the potential of the investor to make poor decisions based upon emotional reaction to market fluctuations.
In different words, a DCA purchase strategy not only keeps money flowing into your investments but also buys shares in all market conditions, including down markets where share prices are falling. Put simply, you will buy low and take more advantage of rising prices when the market recovers. You can set up your own DCA by establishing a systematic investment plan (SIP) at your chosen brokerage firm or mutual fund company.
4. Buy Aggressive Mutual Funds or Sector Funds
Many investors think that, if they want to get higher returns, they need to invest in high-risk funds. As you've already learned in this article, this is only partially true. Yes, investors do need to be willing to take on more market risk to obtain above-average returns but they can do it in a smart way buy diversifying across the best types of funds for aggressive investing.
Examples of aggressive mutual fund types are large-cap growth stock funds, mid-cap stock funds and small-cap stock funds. If you diversify across all three of these fund types, and stick to low-cost, no-load funds as mentioned previously in this article, you'll increase the odds of market-beating performance over the long run, especially for periods longer than 10 years.
Also, sector funds can be inherently more risky than broadly diversified funds. However, adding a sector fund to a portfolio can reduce overall market risk if the fund helps to diversify the portfolio as a whole. Sectors that have historically beaten the broad market indices in the long run include the healthcare sector and technology sector.
5. Asset Allocation
As mentioned at the top of this article, investors don't need to rely on aggressive mutual funds alone for the potential to obtain higher long-term returns. In fact, investment selection is not the number one factor that impacts a portfolio's returns -- it is asset allocation. For example, if you were fortunate enough to buy above-average stock funds in the first decade of this century, from the beginning of 2000 through the end of 2009, your 10-year annualized return wouldn't have likely beat average bond funds.
Although stocks normally outperform bonds and cash over long periods of time, especially for three years or longer on average, stocks and stock mutual funds can still perform worse than bonds and bond mutual funds for periods of less than 10 years.
So if you want to maximize returns but also keep market risk to reasonable levels, an asset allocation that includes bonds can be a smart idea. For example, let's say you want to invest for a period of ten years and you'd like to maximize returns with stock mutual funds. But you want to keep the risk of losing principal down to a reasonable level. In this case you could remain aggressive with an allocation of 80% stock funds and balance out the risk with 20% bond funds
To summarize this entire article, the best mutual funds for you will be ones that combine for an appropriate allocation that suits your tolerance for risk and your long-term investing goals. The five ways to boost portfolio returns are secondary to these objectives.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.