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Mutual Fund Mistakes To Avoid In 2018
In the year 2018, maintaining discipline around asset allocation would be the key driver of returns, and the most prudent investment principle
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This time every year we are all busy looking at the past and into the future to predict how the New Year would be. 2018 is no different. While each year is different from the previous one, predictions always depend on various macro variable assumptions that pan out over the course of the year.
Mutual fund money managers need to stay optimistic and at the same time look at potential opportunities while building portfolios. In this process, portfolio managers try to measure the risk associated with the a) global economy b) Indian macro economy c) behaviour of prices in commodity, currency, interest rate among other things and finally, d) earnings of companies that drives the stock prices. Upon predicting these variables, a portfolio strategy is rolled out as a part of the widely held belief that there will always be some gap between the prediction and the reality. So one can monitor the variations closely and accordingly make course corrections during the year.
Investors, on the other hand, should invest into mutual fund with a very high level of discipline. They should not make the mistake of looking at past returns and assume that the future return will also be the same. One should avoid fixating on repeat successes, and mitigate risks through proper asset allocation.
The general mistake investors make when returns are below their expectation or negative, is to redeem their investments. This should be avoided, given the fact that investments are generally for long term and connected to specific financial goals.
Investors should avoid expecting a fixed return in fixed income schemes. A lot of people are moving from bank fixed deposits to mutual fund fixed income schemes thinking that the latter will give better returns than fixed deposits. At times, it is so, and at times, not. Mutual fund fixed income schemes are also subject to market fluctuations arising on account of interest rate movements. Interest rate movements are generally initiated by the Reserve Bank of India through policy action, or by the dynamics of the market itself.
Another mistake is to invest purely for monthly dividends. There are many investors who participate only in such funds that give regular monthly dividends. They need to understand that monthly dividends are generally paid out only upon making money through accumulated reserves. Assuming that there is no return for some period in the schemes, accumulated reserves will deplete, therefore funds may not give the monthly dividend. Hence, investors must be wary of all schemes bought with high expectations of monthly dividends.
Furthermore, equity market returns may become contingent on our economic growth. This invariably happens when there’s a high “valuations versus earnings” gap. If the earnings upgrade gets postponed due to delays in the revival of our economy, the market may get into sideways or downward corrections. During such periods, investors have to exercise patience.
Finally, watch out for the element of greed. Greed is driven by high expectations in every category of investment — not just mutual funds. Many a times, expectation goes up so much, it results in unreasonable expectations of doubling of one’s money over short-term periods, and so on. Such mistakes or wrong notions should be avoided, as no one can generate superlative performance continuously. Therefore, moderating expectations across all products is the best one can do in order to stay successful in the mutual fund investing.
In the year 2018, maintaining discipline around asset allocation would be the key driver of returns, and the most prudent investment principle.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.