Flash In The Pan:
You must have read about stocks hitting the upper circuit of 10% or 20% in a day in the stock market. But you may have seldom heard about mutual fund schemes doing the same. In fact, if it does, you should be worried, not the other way around. A mutual fund scheme's portfolio comprises various stocks, ideally reputed companies with longterm track records. These stocks are unlikely to hit the upper or lower circuit, unless something extraordinary has happened to the company. Mutual funds are meant to deliver over a long period of time, and not overnight. To make the best of the investments in mutual funds, its is better to invest in a diversified equity fund with a good long-term track record. A classic example is HDFC Equity Fund that has multiplied the initial investments 30 times over the past 16 years since its inception. This must be seen in the light of approximately five times growth in S& P CNX Nifty over the same period of time. Thematic funds may, in some cases, ride the booming sentiment and deliver well in a short period of one month to one year. But if you cannot time your entry and exit, you may land on the wrong side of the market, hurting yourself. It is advisable to let the fund manager of a diversified mutual fund take a call on sector allocations from time to time to enjoy growth across sectors and companies across market capitalisation.
Personalised Solutions:
Don't expect the fund to offer you customised investment options. A mutual funds work on the premise of pooling mechanism. Typically, a mutual fund scheme will have people with different needs. In certain case, it can be even contrasting. This factor becomes very crucial when it comes to booking profits. For example, redemption pressure during dull market conditions may force a fund manager to sell stocks that have huge potential. This can have an adverse impact on you as an existing customer in the scheme. You may also have some preferences when it comes to investments, but in most cases last-mile customisation is not possible in a mutual fund scheme. However, there are ways to handle this issue. Systematic withdrawal plan, where you can redeem a certain amount of money at regular interval say each month, can come to help for those with income needs. Trigger options launched by mutual funds help investors to book profits at a pre-determined rise in NAV over the floor NAV. Products like ethical fund by Taurus AMC and shariah-compliant fund by Benchmark AMC offer investors investment opportunities in a socially responsible way to a certain extent. But, keep that in bold letters, you have to make these choices.
Asset Calls:
Mutual funds go by the mandate of the scheme. For example, equity funds have to invest at least 65% of the money in equity and related instruments. This mandate offers the fund managers a limited scope to book profits and increases their exposure to short-term fixed income instruments at high levels in equities. The same holds true for sector funds, too. The fund manager doesn't have the liberty to dump the sector despite knowing that the sector is not going to do well. That is why, it becomes imperative that the investor himself has an asset allocation plan and rebalances the portfolio at regular intervals. Invest proportionate amount in a diversified equity and pure debt fund and keep a track of it.
Multi-Baggers:
Does the term ring a bell? Well, it refers to stocks that deliver many times their purchase cost. They can also come in various denominations like 10-baggers and 20-baggers. A fund manager invests in stocks that are approved by the investment committee of the fund house. The process ensures risk management of the fund in which your money is invested. This benefit also brings in some disadvantages. Low market capitalisation and low liquidity in stocks of small companies is a hurdle the fund managers cannot jump over in 'investment-process driven houses with strong risk management practices'. This means your fund manager won't be featured along with the top guns in the market. Though good diversified equity funds may not come with such stocks, they are still good candidates for your core portfolio holdings. Let the fund manager manage a 'core portfolio' for you. You can look separately at companies that do not fit into the mutual fund's investment universe but look promising (you can use a small or micro scheme for the purpose). Portfolios of companies with established track record offer you stability. If you combine them with small companies with growth potential, you can enjoy higher returns, though at a higher risk. If you do not have skills to identify such opportunities, then better restrict yourself to equity mutual funds.
Assured Returns:
Your mutual funds can't offer guaranteed returns to you. Sebi has done away with the practice long time ago. So, make sure you understand the risk you are taking while investing in a particular mutual fund scheme. This is called investment risk. Simply put, investors have to accept both gains and losses after investing in a fund. There is little that an investor can do after he invests in a fund. So better ascertain why you want to invest in a mutual fund. If you are aware of your risk appetite, you can accordingly invest. Never invest in a fund with no or limited track record.
