Five big mistakes that mutual fund investors make and how to avoid them
A number of steps taken by the regulator, SEBI as well as by the industry body AMFI and by the various Asset Management Companies and the distributor community have played a great role in the growth of the industry. One can safely say we have reached a point where most people with investible surplus have started considering mutual funds as a serious investment option.
Mutual Funds have gained huge popularity in recent years as evident from the fact that between 1st April 2016 and 31st March 2018, 2.32 crore folios have been added by mutual funds. The Assets under Management (AUM) of the industry increased from Rs 14,21,952 crore to Rs 21,36,036 crore during this period. That is a growth of 50% in two years, no mean achievement!
A number of steps taken by the regulator, SEBI as well as by the industry body AMFI and by the various Asset Management Companies and the distributor community have played a great role in the growth of the industry. One can safely say we have reached a point where most people with investible surplus have started considering mutual funds as a serious investment option. In this context, it is important to keep in mind some of the common mistakes that investors make while investing in mutual funds.
It is All About Equity: Many people have the mistaken belief that mutual funds are all about equity. The fact is that there are a number of debt schemes that can offer superior risk adjusted returns over short and medium term. In fact, if one is investing for a period of say, one year, it might make sense to invest in a short term fund or a liquid fund. The average returns from liquid funds over a one-year period could be superior to what most other fixed income instruments give. In fact, for those who wish to invest the money for less than three years, a fixed income fund might be a very good choice.
Timing the Market: Many investors have the tendency to wait for the 'right' time to invest in the market. This is a futile wait. As far as equity mutual funds are concerned, the right time to invest is when you have the money and the right time to sell is when you need the money or when you have achieved your goals. Equity investment is for long term investors i.e. people who can wait for five years or more. During that period, most equity funds are likely to give reasonably good returns. If you wait for the right time, you are very likely to miss out some good opportunities.
Hunt for the Best Performing Fund: Investors and even many distributors, often base their selection of funds on past performance. The fact is that funds that performed well in the past need not perform well in future. For example, an equity fund which has given the best performance for a one year period may not give the best performance over a five year period. Conversely, a fund which is ranked first over a 10 year period may be ranked last over a one year period. Nobody can predict correctly which funds would give the best returns in future. The important thing is to have faith in the market and stay invested. Your advisor would be able to recommend a good fund from a fund house that follows a robust and disciplined investment process.
Trying to Do It Yourself: With the advent of Direct Plans, many investors have started choosing the funds on their own. On the face of it, direct plans are cheaper because they have a lower expense ratio than regular plans. While this may work well for experienced and knowledgeable investors, vast majority of retail investors would benefit significantly by taking the help of a good advisor. It is important that every investor makes investments keeping mind his/her financial goals, risk profile, expected cash flows etc. Selection of a scheme has to be done on the basis of a proper financial plan. The choice of a wrong scheme can lead to a bad experience for the investor and may even keep her away from mutual funds for a long time. A good advisor can make a huge difference to your fortunes!
Knee-jerk Reactions to Market Movements: Many investors tend to invest in mutual funds, especially in equity schemes, when the market is on a bull run. Similarly, they also tend to redeem their investments when there is a fall in the market. Both are harmful. As mentioned earlier, investments should be made on the basis of a well thought financial plan and it is important that one sticks to the plan. Ups and downs in the market are common and one makes money by staying invested for the long term. 'Time in the market' is certainly more important than 'timing' the market.
The writer is Chief Executive Officer of Union Asset Management Company