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Wednesday, January 25, 2017

Mutual Fund Investments Misconceptions


Mutual fund investment has been gaining popularity over the past few years. A primary reason could be the ease of selling your shares when you want. The fact that these funds are managed by fund managers gives confidence to the novice investor. But there is still some confusion about mutual funds. Let's try and clear the air a bit for you.

It is risky: Of course! it is. As risky as purchasing any product. When you put your hard earned money into buying a refrigerator or a mobile phone, you don't know how long it is going to last. It might not perform as per your expectations. A warranty does not cover everything. Investing in mutual funds will come with a basic risk associated with any market investment. Look at the bright side, you own units of the mutual fund, not the individual securities. You might gain from the large pool of cash invested by other investors and can start with a small amount of money.

It requires expertise: What is expertise? The market cannot be timed. The biggest investors have faced losses at some point. You have fund managers who are professionals. They invest on your behalf. They spread your money across various securities which is the modus operandi of mutual funds. Fluctuations in individual securities do not impact your investment. Hence, a mutual fund on its own minimizes risk. Diversification is an inbuilt quality of a mutual fund.

It is a number game: Do you think a higher number of units is always better? You might be in for a surprise. Most investors calculate returns based on superficial facts. For example, more units bought for Rs 10 can outperform units bought at Rs 200. By purchasing more units at a lower NAV, you might be setting yourself up for failure. Buying more units of a particular fund might not benefit if the scheme isn't performing. A lower NAV in such a case may not impact the returns positively in anyway.

It needs no monitoring: Mutual funds come with lower risk compared to equities. Usually sold as a risk free investment, mutual funds need periodical monitoring. You must not leave everything to your fund manager. While he does the math, you might be better off knowing how your fund is performing year on year in compared to other funds. Reworking your portfolio based on market analysis can get you consistent returns.

It is based on the past: Do you think a top rated mutual fund will always perform? In the market, the past is no guarantee of future performance. Ratings may change. A fund that has been performing last year might not render the same results this year. Tracking the performance of funds over time might help you shortlist your options. Besides, your choice of investment is likely to be a success if you base it on suitability rather than past performance.

Often new fund offers claim to be better than existing mutual funds or stories claim higher NAV means higher growth. But, remember any investment is subject to risk. The success of a mutual fund depends on not one but various factors and you should be aware of them.







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