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Wednesday, May 5, 2010

Mistake MF Investors Make

To get the best from mutual fund (MF), it is important to follow the right approach and make the right decisions. It is commonly perceived that only those investors who invest directly in the stock market are likely to suffer a setback. The fact, however, is that mutual fund investors, too, run a risk - if they error their decisions. Below are some common mistakes investors make and an advisory on how these can be avoided:

Investing without a plan: Many investors start the investment process without determining the investment objectives and deciding on the right asset allocation to achieve these objectives. Though the MF investment process is simple, it still requires planning, perseverance and time.

Underestimating risk, overestimating reward: It is quite common to see MF investors make this mistake. One needs to be careful about this aspect of investing, as different schemes have different risk profiles and you should expect returns commensurate to that.

Going for short term gains: Many investors often lose sight of their long term objectives to fulfill their short-term needs. In this process, they end up making wrong decisions. As a result, they either lose a part of their hard-earned money or earn much lower returns.

Allowing portfolio to ride: Many equity fund investors allow the portfolio to ride when the market is in a bullish phase. In times like these, they often forget about the original mix of equity and debt and/or large-cap and mid-cap stocks. No doubt, the equity market requires a long term commitment to secure investment benefits, but it is equally important to rebalance the portfolio from time to time.

Averse to trying investment options: Investors, who invest in conservative options offered by mutual funds, often hesitate to look at other smart options like monthly income plans, equity and derivative funds and well-diversified equity funds. These funds, if held in the right proportion, have the capability to improve returns for a long term investor. Though investment risks and economic uncertainties can never be eliminated. MFs - thanks to their mix of experience, research and analysis - are in a much better position to ensure that investors in different segments achieve their investment objectives.

Discontinuing SIP in a falling market: SIP, or systematic investment plan, is the best way to build up capital over a period of time for those who don't have a lump-sum to invest. However, it requires discipline to continue irrespective of the state of the market. There are investors who get panic whenever the market witness a fall and get tempted to discontinue to SIP.  However, the fact is that an investor, who takes the SIP route, benefits in a falling market, as he gets more units for the same amount. Therefore, one needs to carry on and reap the benefits in the long run.

Investing in same category NFO: Many investors perceive wrongly that NFO (New Fund Offering) is cheaper as compared to other available funds in the same category. The simple reason is that investors look at the price of 10 Rs per unit which does not make any difference in terms of returns if compared with old fund. Investment in NFO is suggested only if fund offers some value services which is not available in existing funds. Investing in NFO in the same category should be avoided as fund does not carry any past performance. Moreover, NFO promotion and advertisement cost is paid by the fund manger from the total corpus collected from investors. 

Not analysing a fund's track record: One of the most important parameters in the selection process is the past performance. Many investors, however, make the mistake of either ignoring the track record or considering short-term performance while selecting funds. While analysing performance, the focus should be on differentiating investment skill of the fund manager from luck and on identification of those funds with the greatest likelihood of future success.  The following factors are important in evaluating the track record of a fund manager:
  • Consider long-term track record rather than short-term performance. It is important bacause long-term track record moderates the effects, which unusually good or bad short-term performance can have on a fund's performance.
  • Evaluate the track record against similar funds. Success in managing a small - or in a fund focusing on a particular segment of the market - cannot be relied upon as an evidence of anticipated performance in managing a large or a broadbased fund.
  • Discipline in the investment approach is important, as the pressure to perform can make a fund manager susceptible to change tracks in terms of stock selection as well as investment strategy.
Doing it themselves: Many investors do not consider finding a good advisor as crucial. As a result, they either end up making wrong investment choices or dealing with those who don't do justice to their hard-earned money. It is vital to deal with professionals, who have the knowledge and the capability to ensure that the investor remains on course of achieving the investment objectives.