Where do peo­ple go wrong in mu­tual funds in­vest­ing?

Mint Asia ST - - Money - BKY AYE Z AD EA. DAJANIA


April-may 2017, Mint sur­veyed 19 fi­nan­cial ad­vis­ers to know some of the big­gest mis­takes in­vestors make (read them at bit.ly/2p2­va8u and bit.ly/2qxzhgg). Over the next few weeks, we spoke to more ad­vis­ers about these mis­takes (read more here: www.livemint.com/in­vestor-mis­takes). This week, we talk to Bharat Phatak, founder and direc­tor of Wealth Man­agers (In­dia) Pvt. Ltd.

Phatak said that he has ob­served that in­vestors ap­proached MF in­vest­ing look­ing at the “rear view mir­ror”. One ex­am­ple in re­cent times is bal­anced funds and how in­vestors were drawn into them on the back of high div­i­dends. In Jan­uary 2018, Mint car­ried a story on how bal­anced funds were be­ing mis­sold on the premise of high div­i­dends. Bud­get 2018’s im­po­si­tion of 10% div­i­dend dis­tri­bu­tion tax on eq­uity-ori­ented MFS has made div­i­dend plans unattrac­tive but there are some funds that still give a sub­tle as­sur­ance of div­i­dends. “Some in­vestors have this mis­con­cep­tion that div­i­dend is an ex­tra re­turn on your fund. How­ever, when div­i­dend is de­clared, it comes out of your own funds and that re­duces the net as­set value,” said Phatak.

He added that when in­vestors think that bal­anced funds are reg­u­lar re­turn prod­ucts, there is a prob­lem. “Bal­anced funds, like any other eq­uity funds, can be volatile and no in­come is as­sured. It’s just that over a long pe­riod of time, chances to earn higher re­turns are there—with higher risks— but in­vestors need to be pa­tient,” he said.an­other way of in­vest­ing look­ing in the rear view mir­ror is by in­vest­ing in sec­tor funds and closed-end funds.

Al­though sec­tor funds have gone down over time, close-end funds have con­tin­ued. But re­cently, Sebi has told mu­tual funds that it will not ap­prove of any such funds un­less they are dif­fer­ent from ex­ist­ing funds, even if ex­ist­ing funds are open-ended. “This is a good move as in­vest­ing in pop­u­lar sec­tor and closed-end theme funds when they are launched based on a mar­ket fancy is a bad idea. Un­less these funds of­fer some­thing unique, it doesn’t make sense,” said Phatak.

Hav­ing started dis­tribut­ing Mfs—es­pe­cially debt funds—in as early as 1999, when div­i­dends from debt and eq­uity funds were made tax-free in the Bud­get, Phatak knows the im­por­tance of debt funds in an in­vestor’s port­fo­lio. This is also why he ad­vo­cates cau­tion in in­vest­ing in debt funds. “Debt funds are ben­e­fi­cial for in­vestors. But un­der­stand credit risk, in­ter­est rate risk and ex­pense ra­tios. Debt funds are sen­si­tive to high ex­pense ra­tios also,” said Phatak.

He added: “In many cases, it may be too late to cor­rect the mis­takes as in­vestors come to us af­ter they have had a set­back. How­ever, what needs to be done is to avoid the mis­takes in fu­ture and com­pound­ing ex­ist­ing prob­lems. For this, it is es­sen­tial to go back to the draw­ing board, de­cide the ob­jec­tives for which the in­vest­ments are be­ing made and align the re­struc­tured port­fo­lio to them.”


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