The most common misconception when it comes to investing in
mutual funds by a retail investor is chasing the ‘best mutual funds’ which ironically is also the major reason for
falling investor returns.
There is no such thing as the best mutual fund scheme and if you
are in pursuit of one then it is imperative you cut your losses as soon as
possible.
Often in the pursuit of the ‘best mutual funds’ investors end up with an extremely large number of mutual fund schemes.
The Search for best
schemes
FOMO
If an investor does not invest in a particular mutual fund
scheme that has been doing well recently, he will feel as if he is missing out
on something special.
He feels as if he’s making a mistake and others are on the
right since they are investing in the fund that has been doing well recently.
This realization becomes a habitual process which results in
an over bloated mutual fund portfolio since no one fund remains at the number
one spot at all times.
Investing in such a case is directed more by fear rather
than a goal in mind.
Additional reading: Click Here to read whether you should invest directly in stocks or equity mutual funds
Regulatory Changes
Any new regulation change will have a direct impact on how
you invest.
For eg. At times a fund may stop accepting fresh investments
if the fund has grown in size.
At the beginning of 2022, international funds had to stop
accepting fresh investments due to a directive by RBI & SEBI.
In such cases an investor who was already investing in such
schemes via any mode will need to rearrange his plans.
He will therefore need to look at other mutual fund schemes
for fresh investments which will add to the number of mutual fund holdings.
Lure of Exotic Funds
Historically most mutual fund schemes have been launched
when the market has been on the up since it is easier to sell.
The same line of thought can be applied while trying to
dissect why thematic/sectoral mutual fund schemes are launched when a
particular theme/sector is doing well.
Prior to the market crash of 2020, interest in international
mutual fund schemes was negligible.
Post the market crash when international markets were doing
better than the Indian markets is when interest suddenly piqued in
international funds which can be ascertained by the launch dates of most
international mutual fund schemes.
International Funds launched from 1st April 2020 to 31st
January 2022
Motilal Oswal S&P 500
Index |
Axis Global Equity Alpha FoF |
Invesco India Invesco Global
Consumer Trends FoF |
Kotak International REIT FoF |
Kotak Nasdaq 100 FoF |
Axis Greater China Equity FoF |
HSBC Global Equity Climate
Change FoF |
SBI International Access – Us
Equity FoF |
Mirae Asset NYSE FANG +ETF |
BNP Paribas Funds Aqua FoF |
Axis Global Innovation FoF |
Kotak Global Innovation FoF |
IDFC US Equity FoF |
Mirae Asset S&P 500 Top 50
FoF |
HDFC Developed World Indexes |
ICICI Pru Nasdaq 100 Index |
Mahindra Manulife Asis Pacific
Reits FoF |
Aditya Birla SL Nasdaq 100 FoF |
Motilal Oswal MSCI Top 100
Select Index |
PGIM India Global Select Real
Estate Securities FoF |
Mirae Asset Hang Seng Tech ETF |
Nippon India Taiwan Equity |
Motilal Oswal Nasdaq Q 50 ETF |
ICICI Pru Strategic Metal
& Energy Equity FoF |
What is even more fascinating is those that began investing
in international mutual fund schemes with the intent of diversification were in
fact investing only in a particular country or theme which goes against the
very idea of diversification.
A similar case can be made of IT mutual fund schemes.
During such a phase most investors feel left out if they are
not complying with the ongoing trend and end up investing in mutual fund
schemes they do not necessarily require.
Having no Goal
Having a goal/goals is paramount when investing in mutual
funds, in fact it should be the first thing on your mind prior to investing in
mutual funds.
If you have a goal, you will make a plan to achieve that
goal which will require additional inputs in the form of ascertaining the
amount required to be invested, time period, keeping aside an emergency fund,
etc.
When you have no goal, your investing journey is all over
the place since there is no end in sight.
You end up listening to various sources in the search of
‘best mutual fund schemes’ and end up buying and selling as if you are a short
term trader.
These sources could be anyone from your
neighbour,relative,family member or some online stranger with no professional
experience of mutual funds.
If you have a goal, then you will most likely have a mentor
or a guide assisting you along the way.
Additional reading: Click Here to read more about Infrastructure mutual funds
Issues arising in
pursuit of Best mutual fund schemes
Illusion of
Diversification
When you invest in too many schemes without any thought
process, inadvertently you end up investing in the same set of stocks and style
via different schemes.
This gives you the illusion of diversification.
The illusion of diversification can be an extremely serious
mess to get out of cause it is difficult to solve a problem if you are unaware
the problem exists in the first place.
The very point of active investing is defeated since your
mutual fund portfolio ends up performing like an index.
Tracking Error
A large mutual fund portfolio be it in terms of the amount
or the number of schemes is not by default a problem.
It becomes one though when you are unable to track it on a
quarterly basis at least.
This could range anywhere from looking out for changes in
portfolio, style, fund manager, category, merger, etc.
Tracking the changes does not mean you need to act on those
changes, you just need to be aware the impact of those changes on your
portfolio.
As an investor it becomes a herculean task once your
portfolio grows in size and you do not have a professional managing it.
Accumulating thematic funds
In the pursuit of the best mutual funds, you would end up accumulating
a large number of thematic funds.
This is because thematic funds tend to be cyclical in nature.
For eg. For a year after the onset of the first corona wave,
both IT as well as the Pharmaceutical sector funds were topping the chart.
Prior to this though, they were lagging by a good margin to
the sector which was giving the highest returns.
A year later to the first wave, both sector funds were no
more at the top.
This is because every sector goes through various cycles so
if you keep on investing in the best fund, you will end up accumulating a large
number of thematic funds because no one sector remains at the top consistently.
The law of averages eventually has the last laugh.
A mutual fund portfolio that is large in size does not by default become an issue.
It is only an issue when you are unable to manage it, track
it, it is not well diversified or it has not been aligned to your long term
goals.
Your mutual fund portfolio should not necessarily consist of
the best mutual fund schemes, rather it should be focused on having a well-diversified
strategy that is aligned with your long term goals.
It is not possible for all the schemes in the portfolio to
always be at the top, what is important is that the overall returns are on par
with your long term goals.
The process should be far more desirable than the want of
returns since the former takes care of the latter.
Do not waste your precious time in the pursuit of the best
mutual fund schemes, there are none.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com