Photo: iStock
Photo: iStock

Mutual fund investment: HNIs make the same mistakes as retail investors

Many HNIs are oblivious to the need of asset allocation and rebalancing mutual fund portfolios at least once a year

In April-May 2017, Mint had surveyed 19 financial advisers to know some of the biggest mistakes investors make (read them here and here). For the past few weeks, we have been having more in-depth conversations with these advisers about their experiences with their clients (go to livemint.com/investor-mistakes). This week, we spoke to Roopali Prabhu, head of investment products, Sanctum Wealth, a boutique advisory firm.

Over-diversifying

There is a general belief that high networth investors (HNI) are smarter than retail investors. While HNIs are better informed about markets and investment options, experts say they too are susceptible to making the same mistakes as most retail investors do. Why?

“Most HNIs are multi-banked and therefore their mutual fund holdings often are a sum of recommendations across advisers. It usually misses the holistic picture," said Prabhu. Read about the dangers of buying mutual funds from several distributors here:

Prabhu said recently she had reviewed a portfolio of over 70 schemes bought from 6-7 different advisors. “We see investors holding a wide range of sectoral funds—which in effect acts like a diversified portfolio rather than giving it a sectoral edge," she added.

Measuring performance

How you look at past performance makes a difference. Prabhu said many HNIs make buy/sell decisions based on short-term performance. Typically, financial planners suggest to hold equity funds for at least five years and debt funds for at least three years.

Funds also need to be reviewed in conjunction with their investment style. “A market cap agnostic, concentrated portfolio is more likely to deliver lumpy returns but have the potential to deliver longer-term outperformance," said Prabhu. But concentrated funds—or “focus funds" (as per Sebi’s categorisation norms)—should not be compared with diversified funds that stay true to their benchmark indices.

Lack of risk review

Experts like Prabhu tell us that reviewing our risk capacity should be a continuous process. “Portfolio composition keeps changing and with that changes the risk an investor is exposed to. While investors review performance regularly, they rarely take stock of the underlying risk," she said.

In search of yields, when debt funds started to buy low-risk scrips in the past few years, many such funds became riskier than what they originally were. “Therefore, an investment in a debt fund that is already 18 months old, the portfolio risk at the time of investment could be remarkably different than it would be now. While frequent churning is not recommended, it is important the investor is cognisant of these risks."

With Sebi’s recategorisation exercise, investors should be circumspect about thematic funds. Loosely defined theme descriptions can create “below-the-line" risk. In any theme, the temptation to use liberal definitions and invest in sectors that are well-performing concurrently is difficult to ignore for some managers.

No asset allocation

Many retail investors are oblivious to the need of asset allocation and rebalancing portfolios at least once a year. HNIs too are prone to making this mistake, Prabhu said. What’s dangerous, though, is that investors tend to stick to an asset class that is doing well at a given point in time. “Investors don’t want to sacrifice the upside and hence may continue to hold duration strategy debt or equity funds even when risks are not in line with the intended asset allocation," she said.

But rising markets are the perfect time to prune assets that have risen over time and shift some of the gains to assets that are beaten down. “It is always recommended that investors should do a periodic, holistic review and realign the entire portfolio," she added.

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