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Avoid these common mutual fund pitfalls

Avoid these common mutual fund pitfalls
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First Published: Sun, Aug 02 2009. 09 00 PM IST

Updated: Sun, Aug 02 2009. 09 00 PM IST
Equity markets are on the rise. New fund offers (NFOs) are the rage once again. And again, you are receiving solicitations from your financial advisers to invest in mutual funds (MFs) so that you don’t miss the boat. At times such as these, it’s important to avoid the pitfalls of investing, so that you get the most out of your investments.
Invest in funds backed by experienced asset management companies (AMCs) and asset managers
If you had the choice, you’d probably go to an experienced doctor rather than someone fresh out of medical school. It is the same with MFs. It is always advisable to invest through an experienced asset management company and a fund manager, both of which boast an impressive operating and investment history in India.
Cheapest is not always best
This is probably the most common mistake investors make when investing in mutual funds. For some reason, they think that a Rs10 net asset value (Nav) is better than a Rs20 existing fund of the same category and type because the former is cheaper. What matters is the amount of money you are putting in. Rs1 lakh put into either fund will grow the same amount, assuming that both funds are invested in the same underlying securities. So, whether Rs10 grows to Rs12—a 20% increase—or Rs20 grows to Rs24, it’s the same thing.
Don’t invest in a new fund if a previous one of the same category exists
At the time of a new fund’s launch, there is a lot of hype created through advertising aimed at enticing you into investing. However, there might be a fund of this type already existing, which might be a better option because it has had an operating history for a while, as well as proven risk management experience in that category. You are better off avoiding the new fund at its launch and investing in the older fund of the same category.
Understand your risk appetite
Not all medicines are suited to all patients. Some can handle a higher dosage, depending upon their age, their size, the allergies they are prone to, etc. Similarly, not all mutual funds are meant for everyone. Before you invest blindly, understand the risks involved and evaluate whether you can handle the risks associated with the fund and its underlying exposure.
Build a strong foundation
Just as a house needs a strong foundation, so does your mutual fund portfolio. Make sure you have safe and stable exposure to index funds and large-cap diversified funds before you start exposing yourself to sector- and industry-specific funds, which are usually of a higher risk value.
Be realistic about returns
Be realistic about the returns you can expect. Your money is unlikely to double in the next two years through mutual funds—and don’t fall for the salesmanship of your adviser.
Give your money the chance to compound
By chopping and changing your portfolio and getting in and out of funds frequently, you are disturbing the process of compounding and not giving your money the chance to grow. Be patient, even if a fund might not be doing well in the short term.
Content provided by iTrust Financial Advisors
Write to us at businessoflife@livemint.com
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First Published: Sun, Aug 02 2009. 09 00 PM IST