I was exploring google trends. It was shocker for me to see topics that were trending-
Best mutual fund to invest in 2020 india
Best index fund in india
Best performing mutual fund
Best direct mutual fund
Best large cap fund , Best multicap mutual fund , Best small cap mutual fund , Best Mid cap mutual fund etc.
These topics were top trending among others like SGX Nifty, Coronavirus, mask, symptoms, franklin templeton news.
But when i searched about topics like-
Biggest mistake in mutual fund investing
Mistakes to avoid in investment
Worst performing mutual fund
Mistakes you should avoid while investing in mutual fund
Surprisingly there were no trend. Google trends does not show any results. With my experience also with client.
It was clear that risk management is highly underrated. Nobody cares about risk side of the investment.
So i have decided to write the biggest mistakes made by mutual fund investor.
The sole purpose of mutual fund or indeed for any investment is to create wealth but-
High return comes with high amount of risk.
So we invest in mutual fund to manage the risk and to create high return believing that fund manager will take care of your money. IS IT SO? NO…. BIG NO…
Always remember- It's your money as long as you protect it.
Before I highlight mistake let’s understand -
What is Equity mutual fund and various Schemes-? Scheme that invest primarily into listed equity shares of the company (Indian or global equity shares)
SEBI has divided equity shares into 3 category based on their market capitalization.
Large cap- 1st – 100th (Top 100 companies) in term of full market capitalizations - Companies like Reliance industries, HDFC banks , ITC
Mid cap –101st -250 companies in market capitalization - Companies like Info edge , Tata consumer products (Tata Global) , IPCA laboratory etc.
Small cap- 251st onwards in market capitalization- Stocks like affle India, Dixon Technologies , laurus labs , navin fluorine etc.
But this is just a start, Equity schemes further subdivided into 10 category, these categories are based on -
Market capitalization of the stock - Mid cap fund, Multi cap fund etc.
No. of stock in scheme - Focused fund
investment strategy - Value fund , Contra Fund
sectors and themes - Sectoral Fund , Pharma Fund
divided and combination of all
Trust me. If not the PHD, you have to do masters to understand all these thing.
So there are about 500 companies (where mutual funds usually invest) say, BSE 500 but there are more than 550 equity oriented or Hybrid (balanced) mutual funds schemes.
Equity oriented schemes are sub divided into –
Multi cap fund
Large cap fund
Large & mid cap
Mid cap funds
Small cap funds
Dividend yield fund
Value fund and contra fund
Sectoral / Thematic funds
* Tax saver mutual funds invest as per Equity linked saving schemes, 2005- Lock in period of 3 years
Look at the complexity -
As per the Categorization and Rationalization of Mutual Fund Schemes- SEBI has mandated funds to invest minimum amount in particular type of shares. Please refer below table-
So far we have just saw types equity oriented schemes that too their category, other important points like AMC, fund manager, Investment strategy etc. are yet to discuss.
Looking at the structure of mutual funds and overall complexity it's obvious for a layman to make some mistakes.
Biggest Mistakes in mutual fund investing-
1. Avoid Random investments-
Identify goals and do goal wise planning-Usually investor started investing in mutual fund in a very random fashion. I usually see that in bull cycle most of the investor invest in small cap, mid cap and sometime in sectoral funds. In bear cycle they usually invest in large cap fund sometimes balanced fund, debt fund and so on.
Before you decide please understand there are about 500 actively traded equity shares in India but there are more than 500 plus equity oriented mutual fund.
It’s really easy to invest in mutual fund but hard to monitor and review.
2. Avoid Investment in Sectoral funds-
One of the purpose of mutual fund is diversification, but a very basic premise of the mutual funds defeated once you invest in sectoral funds. Rather doing diversification you started concentrating on a particular sector. e.g. Because of coronavirus entire banking sector, Travel, tourism, Hospitality industry, Aviation etc. are beaten down. What if you have had invested in these sector. 80% plus sectors are cyclical that turned according to industry cycle and
3. Avoid Investment in specific market cap fund -
Investment in mid cap fund/ small cap fund or large cap fund is wrong thought process. It’s good for those who are tracking market. Fund manager is way smarter than us.
4. Having No Advisor –
It require lots of efforts / research to choose the right scheme. Even if have chooses a right scheme, regular monitoring is required. Just for saving few bucks you may land on wrong runway.
5. Don’t just invest because of AMC-
Yes AMC do have reputation and we must respect but I usually observe that people started investing just because of name of AMCs Say HDFC mutual fund, ICICI mutual fund but-
Mutual fund is a service industry which is off course run by people like you and me. What if you have invested in mutual fund manager and fund manager left a job. Remember the reliance mutual fund where not only Mr. Madhusudan kela but but Mr. Sunil Singhania and team of other analyst leave the organisation in 1–1.5 years
Over reliance on bank relationship manager -
SBI, ICICI bank , HDFC Bank , Kotak Mahindra Bank are leading banks in india and these are leading AMC as well. Since they have a large branch network. They get ready client with branch network. Off course ICICI will pitch scheme of ICICI mutual fund first. So over reliance on bank relationship manager is not a big mistake that many investor made.
6. Avoid AMCs with governance issue-
I cannot name the AMC, There were some instances in past where severe governance issue has been observed in AMC.s Google search will help you in knowing the same. But again I will repeat having a good advisor will do lot more help.
7. Avoid investment in Debt mutual fund or balance mutual fund- We have separate blog on this – Link https://www.equialpha.com/post/why-you-should-not-invest-in-debt-mutual-funds-and-franklin-mutual-fund-fiasco
8. Avoid lump sum investment-
Nobody can time the market
Invest lump sum amount in mutual fund only when market is cheap. For that you have to understand the valuation of market better way is to invest in mutual fund through STP (Systematic transfer plan) or SIP (Systematic investment plan) this way you can time the market or mitigate the risk of sudden up and down.
9. Don’t invest in so many funds –
As i said earlier it’s really easy to invest in mutual fund but hard to track the same. People used to invest in multiple mutual fund scheme in across the market cycle and end up having 25–30 mutual fund schemes. This kind of portfolio is called random and over-diversified portfolio. One should not have more than 4-5 schemes
Why just 4–5 to mitigate the risk of fund managers performance, their employment and strategy.
Why not more funds- You will not be able to monitor and reviews performance of each funds. Also it will also help you taking fast exit decision if anything goes wrong.
10. Don’t check NAV on daily basis-
Do you call you real estate broker daily and check prices of property. Or do you check surrender value of saving plan. So please don’t check prices of mutual on daily basis. Market is volatile but remember “ups are permanent and downs are temporary”
After reading all these mistakes you must be thinking then what to do?
Point to keep in mind while investing in mutual fund-
Have a good financial adviser ( Not a mutual fund distributor or agent)
Invest in multi-cap fund, They have more liberty to invest in shares across the market cap.
Explore investing in Index fund. Its well proven and less expensive
Identify goals and do a goal wise planning
Do invest in mutual funds only if your time horizon is more than 5 years. ( better is its more than 7 years)
Track your portfolio on regular interval. ( I will suggest twice a year or at least once a year)
Focus on fund manager their performance, their strategy and more importantly fund manager’s stability.
To know more about mutual fund you can watch our YouTube Video -
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