Did You Know | Tips for first-time MF investors

Last week, upon going through a mutual fund (MF) portfolio of a Mint Money reader, we realized that about three years back when she visited her distributor for the first time, she was sold DSP BlackRock India T.I.G.E.R. Fund (DSPT; The Infrastructure Growth and Economic Reforms Fund) and Reliance Diversified Power Sector Fund (RPS), among three schemes.

DSPT and RPS are not bad schemes per se, but being a thematic DSPT) and sectoral (RPS) funds with a narrow focus, they should not have been sold to a first-time MF investor like her. It’s not unusual to see first-time MF investors being vulnerable to greedy agents. Here are a few checks that novice MF investors should run.

Ascertain risk profile

MF distributors get a higher commission by selling equity funds compared with what they get in debt funds. That is because equity funds carry higher risk and along with the possibility of higher return. But you—as an investor—need to assess your risk profile depending on your financial planning needs. For instance, if you need to just park your money temporarily, try liquid funds, ultra short-term funds or at the most, short-term bond funds. But if you are confident of withstanding higher levels of risk, go for equity funds. Then again, within equity funds, if you wish to avoid fund manager’s risk, try passively managed funds such as index or exchange-traded funds.

Avoid thematic and sectoral funds

Stick to diversified funds if you’re just starting out on MF investing. Sectoral and thematic funds focus on one or very few sectors. These schemes are most volatile and investors with a low risk appetite should avoid them. In 2007, when equity markets were on a high, many investors bought infrastructure funds, hoping that the good run of infrastructure sector would continue. Distributors aggressively sold them to unsuspecting investors, like our reader. After 2008, the infrastructure sector has been one of the worst performing. Watch out for names such as “infrastructure”, “rural growth”, “MNC”, or any such names that appears to give a sharper focus to schemes; avoid them if you are a first time MF investor.

Get your investment horizon right

That equity funds are meant for the long run is a fact seldom understood even by the most experienced investors. Fresh investors are more susceptible to some distributors’ motives of getting investors to buy a fund and then to get them to churn after every year or two. Every time you switch to a new fund, your distributor gets an upfront commission. However, you must invest in equity funds for at least three years. The best way to invest in equity funds is to start through a systematic investment plan.