Debunking Mutual Fund Investments Mistakes!

We all may have made mutual fund investments mistakes at some point in our managing portfolio and vow never to repeat them. But, people love to commit the same mistakes consistently because most people have no clarity on what exactly were those mistakes and how they can actually avoid them in future. In hindsight, many of such actions seem so wrong, yet we blindly follow them.

‘The disclaimer mutual fund investment are subject to market risk and its past performance may or may not sustain in future’ is well highlighted, yet there are plenty of investors who have no clue about investment risk or their own liabilities to handle them.  They are gullible enough to be taken for a ride that their money would double and they would earn returns that would overnight make them rich and wealthy. Such is human behavior that investors over generations commit the same mistakes. Psychological research has shown that the human brain often uses shortcuts to solve complex problems.

Only by understanding the right answer to important questions, especially those concerning our finances, can we begin to improve our financial future. For instance, the fixation of fixed returns is so established amongst  Indians that one rarely evaluates real returns, the one that is adjusted to inflation to realize that most fixed returns investment actually earn negative returns.

In our earlier article, you would have read about the importance of equity for long term investing.  Now, the larger lesson from this article is that there is a thin line between committing and avoiding a mistake. These misguided thoughts and feelings get in the way of successful investing, not to mention increasing our stress levels.

 Think Equities are risky and volatile Also Read :Busting Your Myths about Investing!

It is very much true that equities can be volatile if you consider short-term performance, but over time, volatility decreases and returns increase.  In the words of Warren Buffet, “Volatility is an opportunity, not a risk.” The correct measure of risk is the probability of its final, realized returns being less than what could reasonably be expected over that time period. A longer holding period helps reduce risk, even if it covers times of great uncertainty. It does not matter what happens to it between the day you invest and the date that you redeem the money. It should matter only to you, the value of your investment when you are in need of money.

Think NFOs are cheaper to invest (Also Read :Lower or Higher NAV mislead you! )

The most popular misconception that attracts investors towards NFOs is that they are available cheap at Rs10, which is at par. Investors should understand that the cost of a scheme in terms of its NAV has nothing to do with returns. A low NAV would mean a higher number of units held and consequently a high NAV would mean lower number of units held, but the amount of your investment remaining unchanged between two funds with identical portfolio. In the words of Warren Buffet, “I buy expensive suits; they just look cheap on me”. Do not worry about NAVs being high or low, they should be immaterial to your investment decision.

Think SIP frequency earns high returns

The function of SIPs is only your discipline, convenience and natural earning and investing cycle, be it monthly, weekly or quarterly, to keep investing irrespective of market ups and downs. There is no sound basis for saying that a particular frequency of investment is the most profitable. As an active SIP investor, you will face instances when your SIPs in even the best funds will turn losers. In the words of Warren Buffet, “When you buy stocks you should assume the market will close and not reopen for seven years.”  Thus, patiently make good investments should outperform in the long-run, regardless of the macroeconomics environment.

Blindly bet on past performance

The caveat ‘Mutual fund investments are subject to market risk’ holds good even for funds that are several years old. A fund’s past performance is an indicator of how a fund has fared and does not guarantee future returns. A fund with a proven track record would have demonstrated credible performance over different market cycles. In the words of Warren Buffet, “If past history was all there was to the game, the richest people would be librarians.” As a mutual fund investor, it is pertinent for you to continuously track and monitor the performance of the fund in which you invest to know when to exit.

 Buy low and Sell high

It’s time in the market, not ‘timing the market’ that matters. Market timing can often be a losing strategy as you need to make two correct decisions, when to sell out of the market and when to buy back in. In the hindsight, in real time investing, you will never actually know of the high and lows. By staying in the market, you can grow your investments significantly over the long-term. In the words of Peter Lynch, “For more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections.”  Thus, a cheap and falling mutual fund NAV is not necessarily a bargain; it could well be a poor choice.

Time to exit a fund

Investing in mutual funds is very different from investing in stocks. The need to book profits as a concept in mutual funds is partly taken care of if one opts for the dividend payout option. Appreciation in a fund’s value is no reason to exit it; in fact it should be used as an indicator to continue investing in it. But, if you are going to book profits from your investments in a good fund, only to invest it into another fund; here think again. You should consider exiting a fund only, only, only when it has achieved the investment goal or the performance of the fund scheme has started to fall compared to its peers.