Five Mutual Fund Investing Pitfalls To Avoid Right Now
Investors must be cautious of investing into close-ended NFO's (New Fund Offerings) that enforce hard lock-ins on their moneys at this stage
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With the total folio count soaring past the 6 Crore mark recently, Indian investors collectively have more than Rs. 20 trillion (20 lakh crore) stashed away in Mutual Fund schemes now. Although debt fund returns have been erratic over the past year, equity funds have continued to deliver stellar growth. Consider this - as of 1st December, '17, the one-year return from multi-cap equity funds as a category have been an eye-popping 30.85%. Falling returns from traditional asset classes such as fixed deposits and postal schemes have lent a further fillip to Mutual Fund assets, with many former devout FD enthusiasts transitioning to them in the pursuit of better returns. However, it is worth noting that Mutual Fund investing can be tricky, especially if markets play spoilsport. If you're a Mutual Fund investor during these turbulent times, watch out for these 5 pitfalls.
Pitfall #1: Investing without an Advisor
Whether you're a seasoned investor or a new one, the support of an unbiased, competent Financial Advisor can prove invaluable during these times. With bond yields rising past 7%, equity markets staying range bound around the 10,000 (NIFTY) mark, and multiple local and global factors expected to influence markets over the coming 12-18 months, things are likely to be choppy. A trusted Financial Advisor can help you arrive at a robust investment strategy, select a good portfolio of funds, and save you from common behavioural pitfalls as well.
Pitfall #2: Overextending your Equity SIP's
With all the recent brouhaha over Mutual Fund SIP's of late, you may be tempted to overextend yourself with your monthly SIP investments. However, it's a mistake to commit an uncomfortable sum of money every month into Equity MF's via the SIP route. Stick with a number that doesn't prompt you to look at your portfolio with trepidation every day. Typically, a figure that's equal to less than 20% of your net monthly income works best. Your monthly SIP outgo must be planned in such a manner that you don't have to stop and start them periodically - doing so nullifies their biggest benefit.
Pitfall #3: Transitioning from FD's to Balanced Funds
Stung by poor post tax returns, many former FD investors are succumbing to the allurement of balanced funds that afford them higher tax efficiency and have delivered impressive returns in the past one to three years. However, this is a mistake. Balanced Funds are certainly not devoid of risk - most of them have fallen anything from 30% to 50% (absolute) during severely bearish markets, in the past. Make sure you move your FD money to debt funds only - and that too, after consulting with an expert who is privy to the dynamics of the fixed income markets.
Pitfall #4: Getting stuck with close ended & locked in NFO's
Investors must be cautious of investing into close-ended NFO's (New Fund Offerings) that enforce hard lock-ins on their moneys at this stage. While these funds will perforce constrain you to stay put in case markets were to head south (not a bad thing!), locked-in NFO's may also prompt you to take irresponsible investment decisions as soon as their lock-in periods finish, in case their mandated lock-in periods finish amidst the throes of a bear market. It would be much more prudent to stick with open ended large cap funds right now.
Pitfall #5: Deploying lumpsums into equity funds based on past returns
Small & Mid Cap Funds have performed superbly in the past twelve months, prompting many a novice investor to stand up and take note. As a category, they've delivered a year to date absolute return of 38% (as on 1st December, 2017). Unfortunately, these stats are leaving a number of first timers starry eyed, prompting them to hastily commit lump sums of money into them. Remember - what goes up, comes down - and small & mid cap funds can come down fast, if they were to start tumbling. It would be far more prudent to stick with diversified equity funds or large cap funds at this time, and that too, using a 9 to 12-month STP (Systematic Transfer Plan) to complete your deployment.
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