6 Mistakes to avoid while selecting a Mutual Fund

Vaibhav : Yaar Niraj, you had said that “Mutual Funds Sahi Hai”. But I am incurring losses in my Mutual Fund Investments. How does that happen?

Niraj : That’s surprising. How did you select the mutual funds?

Vaibhav : Very Simple. I went to this popular xyz website and saw the list of highly rated mutual funds and invested in them. Also, some mutual funds were told by my banker as they were available at Rs. 10 NAV. So I invested in them.

Niraj : There you are. I now understand why are you making losses. Your selection process itself is wrong. Let me tell you the 6 mistakes to avoid while selecting a mutual Fund.

Mistake 1 : Looking at Past returns as the only parameter for selection

Most of us just look at the past returns and invest in the fund. This is like driving the car forward by looking at the rear view mirror. We must research and understand the future potential and not chase past performance. Remember, the mutual funds themselves say “Past Performance may not be sustained in future”

 

Mistake 2 : Looking at Star Ratings given by websites.

This mistake is almost similar to 1st mistake. This is because the ratings are mainly given based on past performance. So if you don’t look at past performance but go by star ratings, it will be like saying, “Doctor has advised me to stay away from Water Melon, that’s why I am having Water Melon juice”

6 Mistakes To Avoid While Selecting a Mutual Fund

Mistake 3 : Getting Carried Away by Fancy names

Some investors get carried away by Fancy names. When a fund is launched with fancy names and fancy taglines like “Make In India theme” or “Ujjwal Bharat Theme” or likewise, investors think that these funds are going to be the only beneficiaries of the government schemes.

There are some investors who think that if they want to invest for the good future of their children, the fund should have the word “Children” in its name.

This is like saying, for treating malaria , the medicine should have name like “Malaria-Go”;  only then it can cure malaria.

 

 

Mistake 4 : Getting trapped in the Rs. 10 NAV

This happens mostly when there are number of NFOs coming up. All of them offer the units at Rs. 10. As a result, investors think that they are getting it very cheap and they will get more units if they invest in NFO.

This is like saying, when you withdraw money from bank, the banker asks you, should I give you Rs. 100 notes or Rs. 10 notes, and you say, please give me Rs. 10 notes as I will get more notes and I will have more money.

In most general cases, going with an established fund could be a better idea than an NFO. In fact, the NAV has no role to play in wealth creation. If the underlying portfolio grows, the NAV will grow. If a Rs. 10 NAV can become Rs. 20, then a Rs. 100 NAV can become Rs. 200 in the same time frame.

 

Mistake 5 : Selecting the fund looking at the monthly dividend “promise”

There are some funds which are (wrongly) promising an unrealistic and unsustainable monthly dividend of say 1% and investors (including senior citizens) are falling for it.

Lets understand that, an equity oriented mutual fund has a “potential” to generate a return of 12-15% in the long term. But such promises of “monthly dividend” will turn sour, the moment market turns around in the short term. Lets not fall prey to such fooling commitments.

 

Mistake 6 : Not following asset allocation.

There are times when a particular asset class does well and other asset classes do poor or average. Investors get tempted to move “ALL” their money in the performing asset class. Lets remember, if bananas become cheap in a particular year, will we only have only bananas in our meal ? Or will we still continue to have a balanced diet.

Similarly, your fund selection has to be in line with your risk profile, goals and asset allocation. Some people will see that Gold is giving only 5% return and Debt is giving only 8% return whereas small cap has given 20% returns, and they will move all their money to small cap. As a result they run a high risk of incurring losses in the short to medium term.

 

Vaibhav : Wow yaar. I never thought about all this in detail. I thought mutual fund selection is a very simple process.

Niraj : Well, I would say, it is simple for someone who gives lot of time and does the in-depth research. But people who don’t have so much time and expertise, should always go for a professional advisor who can help them. The fees would be far lower than the losses we could incur by making these mistakes.

Vaibhav : Ohh yes , that’s why I keep hearing, “Mutual Funds Sahi Hai, Par Advisor Zaruri Hai”

We look forward to your feedback and comments on the above article.

The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP) is CEO with Nidhi Investments, Mumbai. His articles have a readership from 78 Countries across the Globe. He may be contacted on CEO@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The characters used in the article are real with names changed).

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Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

11 thoughts on “6 Mistakes to avoid while selecting a Mutual Fund

  1. I didn’t get the point star rating… I am unable to understand from example… pls thoda detail me samjhaiye… as in short ki star ranking dekh kar nahi jana chahiye aisa meko samajh me aaya but again exapmle confused me…

    1. Ok. I will try to explain.

      Lets start with the example first. If we are prohibited from having a water melon, should we have water melon juice and say that “See, I am not having water melon” ?

      Similarly, there are many who say that “Yes we do not look at past performance” , but then they say “We look at Star ratings.”

      So finally they are either looking at past performance or something that is solely based on past performance.

      Hope this is clear now.

      Regards
      Prof. Saurabh Bajaj

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