Turn making money into fun exercise rather than chore! Know Mutual Funds Dos and Donts

Mutual Funds have turned out to be one of the most popular modes of investments for many. However, because investors do not generally familiarise themselves with the process involved, it never turns into a fun exercise that you like doing. In fact, it turns into a chore that people want to avoid, even though they are causing a loss to themselves as they then cannot make their money grow. This also deprives them of buying many things they need. 

So, to ensure that investors make their money grow into fantastic amounts, they can begin their investments by knowing the Dos and Don'ts as it is always better that investments are managed in the best possible way by knowing all about it well before investing. 

As managing your investments can be one of the biggest tasks here are some of the important points which are suggested by Erik Hon, MD, iFAST Financial India Pvt Ltd to Zee Business Online:

Investors can put their money in mutual funds by simple methods like Systematic Investment Plan or SIPs. The funds are managed and overlooked by Asset Management Companies (AMCs). 

The first thing to ask yourself is whether you have the time, expertise, interest and discipline to manage your investment portfolio. And the second thing is to recognise that every market and economy goes through cycles and there will be volatility, which can cause you to make irrational and emotional investment decisions that are detrimental to long term portfolio performance. However, if you find that you don’t have much interest in tracking financial markets, understanding asset allocation, rebalancing and active portfolio management strategies, then seek advice from a professional adviser like the SEBI Registered Investment Adviser.

Hon says that, If you do have the interest to understand valuations and impact of macroeconomics on markets, and can be emotionally detached to invest with discipline, then start with a goal-based approach because it creates a framework to your decision making. A goal such as a retirement planning lets you set clear parameters on the risk tolerance, time horizon, required asset allocation to achieve your desired retirement pot. It helps you to ignore the short-term noise and volatility because you know that you are investing for the long term to achieve your goal and you need to stay invested in both good and bad times.

There are many factors at play when it comes to selecting mutual funds because of the number of fund categories, types of plans, the track record of the fund management teams, the different investment mandates and even types of funds available in the market. The information overload can paralyse most to inertia – whereas, the variety of funds actually help create unique asset allocation strategies suited to your goals and saving capacity.

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What are the common mistakes?
Hon says, "A common mistake is to assess how ‘cheap or expensive’ a fund is based on its NAV. The NAV is derived from the value of the underlying assets less its liabilities. An ‘expensive’ fund with a higher NAV can be a better investment than a ‘cheap’ fund with a lower NAV because the sector that it invests in is undervalued. The fund manager also changes his portfolio allocation periodically and can create new units/shares, so the NAV is not in any way an indicator of how expensive or cheap the fund is."

Another mistake is to chase returns without considering the associated risks. He says, " Diversification is important to manage downside risk. Therefore, do not put all in your eggs in one basket. Do not get greedy by investing only into equities with the highest risk such as investing only into a single mutual fund investing in small-caps. You are also not diversifying if you are investing into two mutual funds with similar investment mandates investing only into mid-caps."

Important points:
Hon suggests, to be aware of the costs involved, and try and assess whether the extra cost you pay for a Regular Plan is getting you adequate value. Compare the TER of each product vis-à-vis its performance. For example, large-cap fund vs large-cap index fund vs large-cap ETF. Ignoring costs is expensive in the long run.

Last but not least, the best performing funds in your portfolio today may become your worst
performing funds in the months ahead, so be alert and rebalance your portfolio with discipline, he says.