How to invest in active mutual funds: Smart ways explained

Investors of mutual funds typically make investments through SIPs (Systematic Investment Plans). But sometimes one might have extra money or find that the timing is right to invest it all in one lump sum. A lump-sum investment into a mutual fund is recommended as the best course of action for investors who are familiar with the markets and have an investing plan with a long-term horizon. Mutual fund schemes can be divided between two categories: those that are actively managed and passive funds.

If you’re looking for an active fund, the first thing to be sure of is whether it is genuinely active — not just an expensive tracker. The simple way to do this is to look at the fund’s active share. This basically measures how different the index of any given portfolio is. Replicate it exactly, and your active share is zero. Have nothing in common with it, and it’s 100. If your fund has an Active Share (AS) of under 60 (that is, 60% of the fund’s holdings mirror the index), it is not an active fund but a tracker or a closet tracker. Don’t buy these.

There is ample evidence that high-risk, high-return funds beat low-risk index funds, and then perform better than average after fees and expenses. Then there is size. Studies find that newer funds outperform larger ones, especially when it comes to performance. That makes sense because new funds can be more nimble and more likely to find opportunities that larger funds miss. These funds are more likely to react quickly to opportunities. Larger funds may not have the bandwidth to do as well in a fast-moving market.

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How to Invest in Active Funds?

1) Invest through lump-sum and systematic investment plans (SIP) and staggered transfer plans (STP).

2) Diversify the portfolio across diverse funds (i.e. growth/value) based on cash flows and other such factors,

3) Involve multiple fund houses /Diversify across the same house(s)/Don’t invest in too many funds at one go

4) Don’t invest in more than about five funds across entire portfolio, and don’t have too many overlapping funds from the same fund category.

Active funds are a suitable option for a large-cap category like the large and mid-cap. These funds can produce positive returns because of their mid-cap character. Flexi Cap Funds and Multi-Asset Funds can also be good options among Active Funds.

Active investing offers numerous benefits, including risk mitigation. It enables investment managers to make real-time adjustments to their client’s portfolios based on the current market conditions. Whether it’s diversification, retirement income, or a specific investment return, active investing allows money managers to cater to the unique needs of their clients.

Also Read: Retirement Planning: How much money does a family of four need for retirement?

With SIP, investors can save money by investing small amounts at regular intervals in a mutual fund scheme. This keeps them within the savings limit without breaking their budget. Many mutual funds offer SIP options so that investors can invest a small amount at regular intervals, like weekly, monthly, quarterly, etc. This ensures financial discipline through regular investment.

Overall, if you are investing in mutual funds and would like to make the most of the return without losing your money, you must have patience and perseverance. You should also acquire as much knowledge about mutual fund investments as you can so that you are in a position to make wise decisions. As always seek the advice of professional financial advisors when making decisions about mutual fund investments.

(By Abhinav Angirish, Founder, Investonline.in)

Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.