From
Quantum Mutual Fund
Mutual fund (MF)
investing is simple yet many times investors fail to get all the benefits they
deserve because they fall prey to some common mistakes in investing.
Read Four costly
mistakes to avoid while investing in mutual funds.
(1). Not knowing what
you are invested in..
Sometimes investors
buy mutual funds without any idea of what the underlying security is or / what
type of fund it is. They invest on the basis of ‘hot tips’ that they receive
from their sources.
They might argue how
it matters at all as long the fund they have chosen is giving decent returns.
The point however is, these things tend to matter when performance of the fund
deviates from what was expected.
Many investors having
dozens of mutual funds in their kitty for the sake of ‘diversification’ may
surprisingly find they have achieved very little diversification if they
actually were to glance through the portfolio of their funds. Blame this on
ignorance of investors.
Knowing what you’re
investing in is critical because that would help you set expectations right and
plan for goals effectively.
For instance it would
tell you that it is irrational to expect your diversified large cap fund to
give stellar returns when share markets are in a damp phase, or that equities
are to be avoided if your investment horizon is short, no matter how attractive
the returns look.
Knowing whether the
fund is a mid cap fund or / large cap
fund, diversified fund or sector fund, active fund or passive fund, equity fund
or balanced fund etc, and what differentiates one fund from another - that is
type of underlying security, investment style etc would help you gauge risk and
return associated with them. Read our past article on choosing an equity fund
to know the various types of equity mutual funds out there.
(2). Linking
investments to market levels instead of your goals..
It would not be
surprising to know that a good number of people make investment decisions based
on market moods rather than based on their investment goal. However before
investing, you should have an asset allocation strategy guided by your
investment goals. By having a strategy for investing you avoid letting emotions
get the best of you and your money.
It also helps avoid
duplication of portfolio which happens when one buys several funds for the
purpose of diversification but they all have similar portfolios. This can lead
to overexposure to risk. Asset allocation is the key to having a robust and effective
investment portfolio.
(3). Blindly chasing
performance..
In mutual fund
investments, past performance is no indicator of future performance. Mutual
funds schemes performance in any advertising material is always accompanied by
this disclaimer, as directed by SEBI.
Yet the appeal of
performance numbers is so strong that many investors might be pleased using
performance as the only criterion for choosing their fund.
This is not to
dismiss the significance of track record. However, track record makes sense
only when a fund’s performance over different market cycles is studied, in
comparison with its benchmark & peers, not in isolation. Often new
investors fail to consider performance in relation with market condition and
peers, and end up drawing incorrect conclusions.
Say you come across a
fund that clocked 15 % returns annually in the last five years. Should you be
impressed?
Depends. If its
benchmark returned 19 % in the same period and the average return of its peers
was 20 % then that fund is an underperformer! Or / suppose if a fund that
returned 20 % in the 5 year period just gave 8 % in the 3 year period, should
you be disappointed with it?
Not if its benchmark
gave 5 % returns and the average return of its peers was 6 % in the same
period.
However even if track
record is impressive, it is risky to go with a fund for that alone because a
fund’s performance can tumble after years of illustrious track record.
So, it is important
to dig deeper than performance numbers. Find answers to questions like – is the
mutual fund serious about managing investors’ money well or / only in gathering
it (AUM)?
Take cue from matters
like their attitude towards educating investors, lowering costs, innovating to
make investing simpler, convenient etc. Do the sponsors of the mutual fund
enjoy a good reputation?
Do they emphasize on
a research process or / is fund manager the star?
Of course, this might
take the effort of a few days but it will be worth it. After all it’s about
your hard earned and harder saved money.
(4). Underestimating
the expense ratio..
To manage investors’
money properly and give them good returns over time, mutual funds do research on
quality securities like equity shares; bonds etc. and employ their money in
them. To do this function every mutual fund levies a charge on mutual fund
schemes, known in industry jargon as Expense Ratio.
Expense ratio which
is the charge deducted from the net assets of a fund, impacts your returns.
Higher expense ratio lowers returns. Rarely do investors include expense ratio
in their criteria for evaluating mutual funds. If all else is the same
investors should ideally choose funds that have lower expense ratio.
The impact of expense
ratio is greater in long term investments due to the effect of compounding.
Read our previous QED article for more on the impact of mutual fund expense
ratio on your returns.
In our view, you
should necessarily do your homework prior to taking the investment plunge. Take
the assistance of a financial advisor who can guide you in creating a strategy,
understanding products and keeping tab on investments already made.
Contact - Quantum Mutual Fund
Toll Free:
1800 209 3863 / 1800 22 3863
Board Line No:
022 - 6144 7800 - 804
Fax: 1800 - 22 - 3864 /
+91 - 022 - 2287 5923
(For International Users)
E- mail ID:
SMS: < QUANTUM > TO 9243-22-3863
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