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January 2018: Four Mutual Fund Investing Mistakes To Avoid

With most equity funds delivering handsome returns in 2017, the conformation bias will make it hard for you to look at 2018 objectively

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Each phase in the debt and equity markets brings with it a unique set of pitfalls that investors must guard themselves against. Here are a few potential mistakes that mutual fund investors need to watch out for right now.

Overoptimistically Increasing Your Strategic Allocation To Equity Funds

With most equity funds delivering handsome returns in 2017, the conformation bias will make it hard for you to look at 2018 objectively. However, with a number of push and pull factors in play, this year is expected to be choppy, and a repeat performance of last year is unlikely, to say the least. Resist the urge to be blinded by all the green in your portfolio and deviate from your planned percentage allocation to equities. In fact, you should ideally reduce your strategic allocation to equities this year by anything from 25 per cent to 50 per cent, depending upon your investment objective.

Booking Losses In Your Long-Term GILT Funds

With the yield on the 10-year G-Sec rising sharply over the past few months, most GILT funds and long-term debt funds have taken a serious hit. Rising inflation, monetary tightening by global central banks, and the 2.11 lakh crore bank recapitalisation announcement have been some of the key contributors to this trend. However, we’ll have a lot more clarity on macros as well as the global bank stances by the 2nd half of the year, and it’s unlikely that inflation will keep rising unabated. Don’t succumb to the loss-aversion bias and book out of GILT’s or long-term debt funds right now – hang in there for the next twelve months instead.

Starting Short-Term SIP’s In Equity Funds

The popularity of mutual funds SIP’s exploded in 2017, with more and more first-time investors joining the fold amidst an environment of falling interest rates and rising awareness about the nuances of mutual fund investing. It is estimated that close to Rs 6,000 crore of retail savings now flow into mutual funds automatically each month via the SIP route! Anecdotal evidence suggests that many of these equity SIP investors are getting in with a relatively unclear understanding of how they work. Equity SIP’s are not free of risk, and you may potentially have to withstand longish periods of muted or negative returns from them, in case markets are not supporting. 2018 is likely to be non-conducive to short-term equity mutual fund SIP’s, especially if markets head south or stay flat. Any equity SIP with a time horizon of under 3 years should strictly be made into debt oriented mutual funds at this point.

Choosing The Dividend Reinvestment Option In Debt Funds

A few leading online portals have been publishing erroneous performance numbers for many mutual fund schemes of late, displaying returns that are anything from 10 per cent to 15 per cent (annualised) higher for the dividend reinvestment options of some schemes, compared to the growth options! We checked back directly with asset management companies to verify the accuracy of this information – and it turned out that it was erroneous data. Misled by these numbers, many investors are now opting for the dividend reinvestment options in debt oriented mutual fund schemes. However, each time that a debt oriented fund declared a dividend, remember that you’ll be taking a 28.33 per cent hit on the amount that gets reinvested. Make sure you always stick with the growth option for your debt oriented mutual fund investments.

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