Mutual fund investment as a form of investment has seen its
acceptance levels grow, although the numbers are still low.
Like with anything else, managing your mutual fund
investment is also prone to errors.
Do keep in mind that every investor, even the ones that seem
very successful have all had their fair share of mistakes and no one is
perfect.
The aim should be to keep mistakes as low as possible, keep the basics clear and if possible then to also be able to learn from others mistakes rather than experiencing them yourself.
What are some mistakes mutual
fund investors must avoid?
Imitating
someone else
Very often you would be tempted to imitate someone else’s
mutual fund portfolio, this is more so the case if that portfolio has recently
done very well (open to interpretation).
This would be done without any regard for your own goals,
time horizon, risk appetite, etc.
But this is a very dangerous and self sabotaging approach
because two people cannot have the same risk appetite so a deeper risk analysis
is required.
A mutual fund portfolio needs to be personalized and the
failure to do so has drastic implications in the form of exit load, taxes and
loss of compounding benefits and so on.
No
professional advice
In a highly populated country like ours, opinions will
always be aplenty and mutual funds are no exception to that.
It is one thing to receive unsolicited advice from family
and relatives but with mutual funds recent trend suggests that investors also
seek advice from strangers on social media who are no more qualified than them
for mutual fund ‘advice’.
This never bodes well since the advice you receive, whether
solicited or unsolicited has no accountability or qualification and you end up
moving in and out of schemes based on differing advices you receive which in
turn means higher taxes and exit load charges.
Mutual fund advice is not a one time thing, it is:
- Prior to investing
- While invested and
- How to redeem
So do the simple and sound thing of reaching out to a
distributor/adviser for better handling of your mutual fund investment.
Be it wealth or health, only let the qualified professionals
enlighten you.
Additional reading: Click Here to read more about how multi cap funds work
No periodic review
A mutual fund portfolio must be reviewed periodically, ideally once a year.
This review should be undertaken by a qualified professional or else it would be a futile exercise.
A periodic review helps to confirm if the goals and your mutual fund portfolio is still aligned and on track.
This is important because mutual funds could go through several changes like change in category of fund, restriction in amount, strategy, aum, etc.
It is not a given that you would need to alter your mutual fund portfolio due to reasons mentioned but you would need to review if any changes are warranted.
No
risk profiling
Mutual fund investments are subject to market risks
This is often accompanied with most mutual fund related
material and yet very rarely do investors dig deeper into this.
Every mutual fund scheme will have its own risks and the
ability to withstand it will differ for each investor.
Then comes into the picture other factors such as time
horizon, goals, mode of investment, etc.
Even an individual having all the same attributes as someone
else can still have a different risk appetite, the personal in personal finance
is of more weight than finance.
Over
diversification
There is diversification and then there is over
diversification.
The purpose behind diversification is to be able to
diversify risks and amplify returns for your mutual fund investment.
More often than not investors make the grave mistake of over
diversifying which brings along with itself its own set of problems.
Overlapping is one of them, you end up investing in the same
set of stocks and strategy even though you may think otherwise merely because
you invested in various mutual fund schemes.
Understanding
a particular fund
Most investors are unable to understand a fund like it
should be understood.
Unfortunately mutual fund schemes are judged merely on their
returns, that too short term.
As much as your reasoning for investing in mutual funds is
returns, that’s not how it works though.
For example a balanced advantage fund would most likely and
ideally generate lower returns than say a mid cap fund.
In the same vein, a mid cap fund would be more volatile than
a balanced advantage fund.
Also what you need to keep in mind is that more often than
not even funds from the same category can have varying strategies and thereby
varying returns.
A large & mid cap fund needs to necessarily invest a
minimum of 35% each in large and mid cap stocks, the remaining 30% has no such restriction.
Every fund manager will decide where and how to invest the
remaining 30% as per her own thinking which would bring about different returns
and strategies among various large & mid cap funds even though they all
belong to the same category and have the same mandate to follow.
Diversification
with same fund house
It is often seen and with empirical evidence to back it that
various fund houses have garnered most of their aum during a very short
specific period.
This short specific period is when most of their schemes
must have outperformed their peers.
Recent example includes Parag Parikh mutual fund and Axis
mutual fund whereas if we go further back then there is HDFC mutual fund and
Mirae Asset mutual fund.
The issue with such an approach is that there is no
inspection as to why all or most schemes of a particular fund house did so well
during a very specific period.
The reason more often than not is due to the same strategy
applied across all schemes of the fund house with exposure in the same set of
stocks.
This is precisely what Axis mutual fund had implemented with
its focused, flexi cap and bluechip fund all having more or less the same portfolio.
Therefore even though your mutual investment is spread
across different schemes and therefore you believe you have achieved
diversification, but in fact all that you have done is basically invested in
the same set of stocks via different schemes.
Additional reading: Click Here to read about the overlapping issue with Mirae asset mutual fund schemes
Investment
versus trading
Investment requires a long term plan to achieve your goals,
whereas trading does not.
Mutual fund investment has nothing to do with timing the
market, on the contrary timing the market can prove hazardous to your mutual
fund portfolio.
Trading is all about timing the market, knowing when to
enter and exit the market.
More often than not investors make the silly mistake of
trying to time the market, at times even with their sip investments which goes
against the very fundamentals of starting a sip to begin with.
Not
aligning with goals
Ideally your mutual fund investment should be aligned to
life goals, either certain schemes to each goal or your complete portfolio to
one goal.
Whether you have any goal or not, we all are going to retire
at some point so retirement by default becomes a goal and that becomes all
the more important considering the rising health expenses and gradual increase
in life expectancy.
Having a goal helps you stay disciplined but more
importantly it helps you see the bigger picture with regards to your mutual
fund investment.
Goals help you stay calm when the markets are volatile
because you know your goals are still far away and there is no need to panic by
short term volatility.
High Returns is not a goal, it is a desire and personal
finance is about goals and having a plan to achieve them and not about
fulfilling desires.
Short
term returns
Short term returns are a very bad indicator with regards to
the suitability of a fund for you.
Past performances be it long term or short are neither
indicator of future returns nor a guarantee of future returns.
It is important to analyze why a particular fund has impressive
short term returns, it could either be the calls have played out well or a
certain change in law or strategy has helped them.
No matter what the reason, short term returns should not be
accorded much importance and should definitely not be acted upon.
Sadly though this is far from reality, many investors take
the plunge into mutual fund schemes based on short term returns.
It is natural for the markets to be volatile, mistakes are
given like any other field but what is sad to note is that most mistakes with
regards to mutual fund investment can be avoided if only a more sensible
approach is undertaken rather than a hurried one by mutual fund investors.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
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