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Muddles To Evade While Investing In Mutual Funds

Muddles To Evade While Investing  In Mutual Funds

Mutual Funds are slowly heading towards being one of the most loved asset classes in India. Be it the increasing investor awareness drives, the demographic advantage with increased purchasing power or both, investment in mutual fund industry is increasing every month. Just before the economic reforms, the industry’s (UTI) Asset under Management (AUM) was a modest Rs6700 crore. And, at the end of October 2018, the total AUM of the industry stood at Rs23.59 lakh crore. It is to be noted that around 11 per cent of registered PAN account holders and only two per cent of the total Indian population is investing in this asset class. So, the potential growth for this industry is still huge.

However, as the calendar year 2018 has shown, market investments are subject to risk, and wrong investment decisions can have a cost during volatile periods. Acknowledging the fact that volatility is here to stay for at least the next half year till the Lok Sabha elections, we look at the most common mistakes that a person commits while investing in this asset class and how to overcome it.

According to Ashwin Patni, Head of Products and Fund Manager, Axis Mutual Fund, there are two important things to remember while investing in mutual funds— “Start early to benefit later on and maintain a financial discipline.” Giving excuses like someone is drawing a low salary is one of the most common mistakes committed by investors, he opined. Adding to this, G Pradeepkumar, CEO, Union Asset Management Company, said, “The beauty of mutual funds is that there are different types of funds and you can always find one which meets your requirements irrespective of your age, profession, sex and market condition.”

But once they have decided to invest, people often get confused about choosing the right funds. According to Seemant Shukla, Senior VP, Personal Wealth Advisory- Edelweiss, “I feel the most common mistake people make while selecting a fund is by deciding on the basis of recent performance of the scheme, whereas, risk- especially in the bull market is ignored.” Sundeep Sikka, ED and CEO, Reliance mutual funds, added, “Investors should consider long-term track record over various periods, and also evaluate the fund’s positioning and portfolio in the prevailing market context.” To put their views in simpler terms, extraordinary performance by particular fund ‘A’ in the preceding year should not be the only criteria for investment. Other factors such as its long-term returns, positioning, company manager, and exposure to companies in equity, should also  be considered.

Another mistake that investors commit is withdrawl before the completion of market cycle. Markets—be it debt or equity—go through a cycle of ups and downs. If there is untimely withdrawal- not only chances of making profit reduces, but the probability of affecting the invested corpus increases. Please refer to table one, minimum time period of different schemes according to different scholars. For this, Raghav Iyengar, CEO, Indiabulls AMC, opined, “A mismatch between investment objectives of the fund and the investor should be avoided.” In simpler words, an investment decision— as always underlined by all planners should be based on an objective. If the objective derives funds selection, the possibility of loss making is reduced. One important mistake that all subject experts encountered is emotional decision making. According to Patni, the focus should be on the objectivity of the fund. Adding to this, Iyengar said that mutual fund investment is not a perception rather it is more of a reality and experience. “While investing, investors should leave aside any baggage they carry from peer experiences through herd mentality. They should focus on consistency and neutrality” he added.

Tackling volatile market conditions is another issue that investors should consider on a serious note. Kumar said, “It is futile to enter or exit investments based on volatility. It is always wise to stay invested for a longer period than succumbing to volatility that may crop at various times.” Smart investors make money by sitting tight during times of volatility, he added. Shukla furthermore added that it is always advisable to plan investments for eight or 10-15 years to beat any instability in the market.

Besides these, trying to time the market, not taking expert advice, investing without understanding the products, avoiding diversification and not being able to understand one’s risk bearing abilities are certain common mistakes that an investor commits.

To sum it up, for wealth creation in a country like India—mutual funds is one of the most important asset classes. But lack of proper understanding, illogical decisions and untimely exit can have a bearing on one’s portfolio. So, it is important that these mistakes be avoided while investing in the mutual fund schemes in the future.

suyash@outlookindia.com

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