Mutual fund suits long term investing and thus ignoring the short-term gyrations of the market movement is the best approach.
MF Mistakes: The kind of volatility witnessed in the stock market over the past few months may have left many mutual fund investors perturbed. And, this may be because many investors commit some common mistakes and hurt their finances. Trying to time the market and stopping SIPs are some of the common mistakes that many investors make. Waiting for the market to go up and then invest leaves many investors stranded for good returns. Rather, buy low, sell high should be the approach. In fact, mutual fund suits long term investing and thus ignoring the short-term gyrations of the market movement is the best approach.
The latest data shows that mutual funds’ asset base dropped 8 per cent to nearly Rs 25 lakh crore in the quarter ended June 30, mainly due to outflow pressure in equity and debt categories. And regarding equity inflows in the mutual funds, Sachin Shah, Fund Manager, Emkay Investment Managers says, “There has been an overall slowdown in the equity inflows, but the Gross Inflows for the month were at Rs 13,000 crore plus whereas the jump in redemption to also nearly Rs 13,000 crore plus is what is making the Net Inflow data look neutral.”
But, what about the SIP data? “At least till last month SIP number was steady at Rs 8,000 crore plus and I would like to believe it would remain steady around that number, simply because it’s very granular at nearly 3.2 cr SIP accounts, so discontinuing of few thousand SIPs will also not reduce the overall SIP inflow significantly,” adds Shah.
Here a few common mutual fund mistakes that investors should avoid:
Not sticking to plan
Not sticking to one’s asset allocation plan is a grave error. Based on one’s risk profile and duration of the financial goals, have an asset allocation plan in place and stick to it. “The biggest mistake that an investor may commit at present is diverting from the financial plan, assets mix or investment strategy. Some may think of exiting equity investments or investing more in Gold, as the former is struggling and latter is appreciating,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to armed forces officers and their families.
Ignoring risk in debt funds
Debt funds are meant to generate a high effective post-tax return for goals which are about three years away. But, choosing the right debt scheme requires careful evaluation. Not many investors do that and choose to invest based only on their recent high yields. “Recently, we have seen defaults by securities in a few debt funds and investors have lost their money. This was a product which was sold as being as safe as an FD but unfortunately the underlying is much riskier than that. Investors must not just look at the yield of the portfolio but also understand the holdings in the fund to evaluate whether it is appropriate for their risk-taking ability,” says Rishad Manekia, Founder and MD, Kairos Capital, a Mumbai-based financial planning firm.
Equity markets are inherently supposed to be volatile. But, if your goals are far, such volatility should not be a matter of concern. “There are other conservative investors who might go a step ahead, redeem all their investments to be on the safer side and put it all in say, savings bank account getting negative inflation, tax-adjusted returns. Such actions can only jeopardize their future goals provided they had invested in a correct asset allocation strategy as per a plan in the first place,” says Col Govila (Retd). On the contrary, one may top-up and add more into the same MF folio in these times when the markets are down.
No exposure in international markets
Not all global economies work in tandem and not all global equity markets are co-related. Investing in international markets is an important dimension of diversification. “For the past several years, and even today, investors have missed out on investing in international equities. If we look at our everyday consumption, we are perfectly happy to buy Hyundai cars, Samsung TVs, LG washing machines and Google phones. So when we are spending on products of internationally listed companies, then shouldn’t it make sense to also invest and get exposure to these global companies?,” says Manekia.
All the leading US stock market indexes such as S&P 500, Nasdaq composite etc are trading near their all-time highs.
Too much diversification
It is important that you keep diversified across assets and investments and even in different schemes. However, over-diversification may not serve the desired purpose. “Over-diversifying is another mistake that investors tend to make in falling or volatile markets. In order to mitigate the risk, some investors may try to spread their money in multiple funds and several categories of funds like large-cap, mid-cap or small-cap, or even start investing in sectoral funds which are supposed to do well in times to come. It may probably help in the short-term, but in the long-term, it may backfire when the market situations change. One should understand that diversification beyond a point do more bad than good to your portfolio,” informs Col Govila (Retd)
Overexposure in Gold
While many investors could have burnt their hands in the downturn of equities and debt schemes, gold over the last one year has generated nearly 40 per cent. And, more and more investors are now jumping on to the bandwagon and over-exposing in the yellow metal. “Because of gold prices going up, there is a risk that investors may go overboard and invest too much in Gold. Certainly, gold has a place in one’s portfolio, but it should be limited to a percentage based on the asset allocation, informs Manekia.