Putting money in mutual funds: Some common mistakes investors make
We all make mistakes, especially when it comes to managing our money. Take mutual fund investments. From buying them by the dozen to buying none at all — a cursory glance at an average investor’s portfolios would reveal many such holes. Eighteen of India’s leading financial advisers talk about the major shortcomings they see in clients’ mutual fund portfolios.
Thirteen of the 18 advisers we surveyed say this is a common problem. Many times, investors buy funds based on past returns only. “This results in multiple funds of the same type in a portfolio. For example, investors buy multiple mid- and small-cap funds when they are doing well, or government securities funds when interest rates fall,” says Vishal Dhawan, founder and CEO of Mumbai-based Plan Ahead Wealth Advisors.
When they invest without a plan, investors get saddled with too many funds, said all 18 planners. “When customers walk in with portfolios that are full of ‘flavour of the month’ funds, they are either consumers of advertising frenzy or have worked with a triggerhappy distributor,” says Shyam Sunder, managing director, PeakAlpha Investment Services Pvt Ltd.
Holding too many schemes has another dangerous fallout, says Mumbai-based Vinod Jain, principal adviser, Jain Investment Planner Pvt Ltd. Getting existing portfolios in order could be very time consuming, he says.
When they ask clients why they invested in so many mutual funds, eight of our respondents found that investors had tried to time the market. “Mutual funds are traded like equity under the assumption that if they regularly book profits, it reduces risk,” says Poornima Katpadi, founder and investment specialist at Simplesolution4u, a Mangalore-based distributor. Valmiki Khatri, partner, Krushna Finserve LLP, says some investors have “low risk appetite but want high returns.”
The key is to control emotions. “Volatility in markets often leads to uncalled redemptions,” says Khatri.
Another peculiar problem is the obsession with dividends, said eight advisers. Investors tend to choose the dividend option even when they don’t need regular income. “Dividends are not guaranteed and the true reflection of a mutual fund’s performance is a combination of capital appreciation, or depreciation, and the dividend paid,” says Dhawan. Experts suggest a two-pronged strategy to choosing the right plan. One, know that “the dividend pay-out option is not required if you are in the wealth-creation stage,” says Katpadi. Two: dividends get distributed out of your profits and the net asset values falls after they are paid.
Five of our respondents say that investors hold on to dud performers for years and don’t do anything about it. Amol Joshi, founder, PlanRupee Investment Services, says investors hold on to losers “because they had chased a hot theme, maybe sector funds, at the top of a (market) cycle.” Anup Bansal, co-founder and MD, Mitraz Financial Services, says that such mistakes are often avoided if investors engage with registered advisers.