6 MinsMarch 23, 2020
As a mutual fund investor, you have heard about the power of Systematic Investment Plans, the magic of compounding, benefits of investing for the long term and so on. But are you yet to see meaningful gains in your mutual fund portfolio? Or have
you lost money in your investments? Read on to know if you are making the following mistakes and how you can avoid them.
Investing in only one fund house
Your investments may be skewed towards the schemes of a particular mutual fund house. Your investment decision could be based on the assets managed by the fund, track record of
the star fund manager, returns, or penchant for a big brand. But this approach may increase the fund house concentration risk of your mutual fund portfolio. Remember to always follow the basic tenet of investing, i.e. diversification and invest
across fund houses.
Over diversification across fund houses
Over-diversification, too, is bad. If you buy every New Fund Offer (NFO) that hits the street or add schemes to your portfolio based on recent returns, this could lead to overcrowding of your portfolio. This makes the portfolio difficult to manage
and does not necessarily reduce the risk. It offers no extra benefit beyond a point and dilutes the wealth creation ability of the portfolio. Ideally, your mutual fund portfolio should be optimally diversified with 10-12 best-performing and suitable mutual fund schemes.
Not focusing on scheme selection
While choosing mutual funds schemes pay attention to your risk profile, broader investment objectives, financial goals, and the time horizon before goals befall. Don’t follow
tips and/or copy someone else’s investment portfolio or invest on an ad hoc basis.
In addition to past performance, evaluate mutual fund schemes on both quantitative as well as qualitative parameters. Some of these include returns over various time frames, performance across market phases, risk ratios, the scheme’s expense
ratio, and portfolio characteristics.
Also look at the credentials of the fund management team, and the investment philosophy, processes, and systems of the mutual fund house.
Also Read: [Types Of Mutual Funds]
Not reviewing your portfolio regularly
Just as you undergo regular medical check-ups to identify health problems and take remedial measures; reviewing the financial health of your portfolio is necessary. You simply cannot adopt the 'invest and forget' approach.
Do a periodic review and rebalancing of your portfolio, say bi-annually. This will serve the interest of your long-term financial wellbeing and boost long-term wealth. Here are the key benefits of a portfolio review:
- Helps cull out the underperformers;
- Reinvest in better alternatives;
- Ensure optimal diversification;
- Consolidate the portfolio;
- Rebalance the portfolio, if necessary based on your needs;
- Ensures that you are on track to accomplish the envisioned financial goals
Trading in mutual fund schemes
You could end up losing your money if you attempt to ‘trade’ in mutual fund schemes. As long as you hold the best-performing and suitable mutual fund schemes in your portfolio, short-term fluctuations should not concern you.
Consider exiting only when…
- The mutual fund scheme is consistently underperforming;
- The fundamental attributes of scheme changes and are incongruent with your risk profile and broader investment objective, time horizon, and may get in the way of your liquidity needs;
- You need to rebalance the portfolio;
- There is a better alternative;
- And/or you have achieved the desired corpus for a financial goal
Panicking during a market downturn
If you panic and stop/discontinue SIPs in falling markets, your focus shifts away from asset allocation and goals and you overlook the performance of the mutual fund scheme. Ideally, you should
continue with your SIPs irrespective of whether markets fall or rise, as long as the mutual fund scheme is amongst the best-performing and suitable ones.
Descending markets allow you to gather more mutual units at a lower cost. When equity markets move up, the value of your investments will appreciate.
Ignoring tax implications
While growing wealth is the ultimate investment objective, also pay attention to tax implications as these could also impact your returns. For instance, after Budget 2020 made dividends earned taxable in the hands of recipients as per their applicable
income-tax slab rate, the growth option in mutual funds will be more beneficial, especially if you are in the high tax bracket. Also, the Systematic Withdrawal Plan (SWP) would be a better option to generate regular income instead of the Dividend
Similarly, when you redeem your mutual fund, gains will be subject to Short Term Capital Gain or Long Term Capital Gain Tax as the case may be and the tax rate will vary depending on whether it is an equity-oriented or a debt-oriented scheme.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information of this article. Please consult your financial advisor before making any financial decision.