How to Get Higher Returns on Mutual Funds

How to Maximize Your Portfolio Returns

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Find out how to capture the best returns for your portfolio of mutual funds. Getty Images

Many investors search high and low for the best way to get higher returns on their mutual fund portfolios. But the challenge is to find ways to maximize performance without taking excessive market risk to get those returns. Yes, you do have to be willing to accept fluctuations in the value of your account if you want to see stronger relative returns in the long run. But you can also be smart and strategic in balancing risk and return by using any or all of these time-tested methods.

 

Get Higher Mutual Fund Returns by Keeping Costs Low

You can't control the stock market, but you can boost returns for your mutual funds by minimizing your expenses. Think of this as you would your household budget. You can't give yourself a raise in pay, but you can do something that can have an equal effect: Keep more of your hard-earned money by spending less.

The first thing you can do to keep costs low is buy no-load funds with low expense ratios. No-load funds don't have sales charges which can come in the form of a front load — you'll often pay more than 5 percent of the purchase — or a back load where you pay the charge when you sell the fund.

Expense ratios are the fees that you don't see quite as clearly. These are expenses that go toward paying the operational cost of the mutual fund. For example, if your mutual fund has a total return of 10 percent in one year and the expense ratio of the fund is 1.5 percent, your actual return will be 8.5 percent.

Now imagine that you bought a similar fund with a lower expense ratio of just 0.5 percent. Your actual return in this simple example would be 9.5 percent. That one percent difference really adds up over time. Do a little research to learn how to find the cheapest funds and keep more of your hard-earned money.

Other ways to keep costs down with mutual funds is keep trading to a minimum, or buy funds with no transaction fees. Many discount brokers and mutual fund companies offer no-load funds with low expense ratios, but this doesn't mean there aren't other potential charges that can add up to big expenses. One such cost is a transaction fee, usually around $10 per trade. If you're placing several trades per month, these fees can really add up. The buy-and-hold strategy of investing will not only keep your trading costs low but you'll also avoid many of the costly mistakes investors make when trying to "beat the market," which often leads to lower returns.

Get Higher Mutual Fund Portfolio Returns by Increasing Exposure to Stocks

One of the first steps to take when you're building a portfolio of mutual funds is to decide your asset allocation, the mix of the three main asset types — stocks, bonds and cash — that will make up your portfolio. A moderate portfolio of mutual funds might have an asset allocation of roughly 65 percent stocks, 30 percent bonds and 5 percent cash, but if an investor wants to improve the performance of the portfolio AND he's willing to take on more market risk, he might choose to make the asset allocation more aggressive.

He could increase exposure to risk. The moderate portfolio allocation could be adjusted to 80 percent stocks and 20 percent bonds. This would be considered a moderately-aggressive asset allocation. If you're not sure if this increase in stock funds is a good idea, you can use a risk tolerance questionnaire to see what asset allocation is appropriate for you.

Improve Portfolio Performance by Investing in Aggressive Growth Mutual Funds

When you invest in aggressive growth mutual funds, you have the potential to get higher returns than the broad market indices, such as the S&P 500 Index. Many aggressive growth stock mutual funds have the term "aggressive growth," "capital appreciation," "capital opportunity" or "strategic equity" within the fund name. Just like increasing your exposure to stock funds, however, using aggressive growth stock funds can result in higher long-term returns than market averages but you must be willing to take an extra market risk.

This means periods of volatility (ups and downs) in the value of your funds.

Get Higher Returns With Sector Funds

One way to beat the market is to find the best sectors that can outperform the stock market as a whole. As you might imagine, there's no certain way to do this, but a few sectors have generally outperformed the major market indices and can potentially continue to outperform for years to come. Examples of the primary industrial sectors include technology, health care, consumer staples, consumer cyclicals, utilities and financials.

Technology is a sector that could outperform other sectors in the years and decades ahead. Economies and businesses around the world are interconnected by technologies, such as manufacturers producing computer hardware, computer software or electronics. They're also connected by technological service industry companies, such as those providing information technology and business data processing. Some examples of technology companies include Apple, Microsoft, Google and Facebook.

Another sector that could grow faster than the averages is the health care sector. With an aging population and rapid advances in biotechnology, the health industry is sure to thrive in the years and decades ahead. When many industries are doing poorly due to negative economic conditions, the health industry can still perform relatively well because people still need to see the doctor and buy their drugs regardless of economic conditions. The healthcare sector is considered a defensive sector for this reason. 

The Best Way to Get Higher Returns on Mutual Funds

The single greatest control that investors can have over their portfolio growth is contributing more money. You can't control the economy. You can't control the market. And you can't control how your investments perform. But there is a difference between the return of the investment and the return on the investment.

For example, if you buy a mutual fund that averages a 5 percent rate of return over the course of three years, you might not be incredibly happy with that return. Now let's say that average comes from a 10 percent return in the first year, a 10 percent return in the second year, and a 5 percent return in year three. Your average return on the investment would be higher than the three-year average of 5 percent if you were to buy more shares during the year the fund declined by 10 percent. You'd average your return higher because you bought more shares at a lower price. This describes a basic investing concept and strategy called dollar-cost averaging, or DCA for short.

A similar idea is to periodically rebalance your portfolio. This means buying more shares of mutual funds that have declined in value and selling shares of funds that have increased in value. For example, you might have five mutual funds each with a 20 percent allocation, and a year later the fund values fluctuate and the allocation percentages are 15 percent on two funds, 25 percent on two funds, and the fifth fund remained at 20 percent allocation. You'd sell shares out of the winners and buy into the losers. This is the "buy low sell high" strategy but in a responsible way. A good DCA schedule is once per year.

In summary, the best strategies to get higher returns with mutual funds are those that are within your control. It's a mistake to try and perfectly time the market or to think that you'll select the best mutual funds every time. Instead, keep things simple.