Photo: Reuters
Photo: Reuters

We tend to forget why we had started to invest

This typically happens when you don't do asset allocation and buy funds in isolation of one another

Often—and over a period of time—we put in money to make investments in a piecemeal manner. In mutual fund terms, we buy one mutual fund scheme today, another one say after 2 months, then again another a few months down the line and so forth.

By the time we make our fourth or fifth investment, we tend to forget why and when we had made our first investment. This typically happens when you don’t do asset allocation and buy funds in isolation of one another.

When Mangaluru-based financial planner Poornima Katpadi on-boards new clients (or investors) for providing financial planning services, one of the most glaring things she notices in her clients’ portfolios is the absence of asset allocation. “Most of the new investors have far too many equity funds in their portfolios. There is very little or zero exposure to debt funds. They are over-exposed to equities," said Katpadi.

Sometimes, added Katpadi, a haphazard way of investing can also lead to wrong choices. For instance, she says many customers invest in equity funds just to get their bank distributors off their back. For example: selecting the wrong options—like investing in dividend plans when they don’t need dividends and just because dividends are tax-free.

“In most cases, we find that dividends are not required by our clients because they are in their wealth-creation stage," said Katpadi. Mistakes are committed not just at the time of buying but also at the time of selling, like the urge to book profits akin to what many do in the stock markets.

Many mutual fund industry officials have voiced their displeasure as to how funds houses, especially some balanced funds, have been peddling balanced funds.

Rough industry estimates say that the average assets under management (AUM) of dividend plans in balanced funds, in the March-June 2017 quarter, grew to Rs39,684 crore, compared to Rs29,206 crore in the January-March 2017 quarter. That’s a growth of 36%.

The average AUM of growth plans of balanced funds for the March-June 2017 quarter grew to Rs52,051 crore, which is up from Rs40,701 crore in the previous quarter. This is a jump of 28%.

Conscientious financial advisers and distributors suggest first-time investors to look inwards and first figure out why they want to invest.

Roopa Venkatkrishnan, a prominent Mumbai-based distributor swears by this rule. “I want them to think about why they are investing. Do they want to buy a house? Plan for their kid’s further education? When will they need this money? What will they do with the extra income if the breadwinner gets a salary increment.... Those sort of things. A significant majority of investors don’t know what they want to do with their money," she had told Mint in an earlier interview.

Katpadi agrees: “I would first ask investors to figure out what is very important for them and what makes them happy. There are so many people who waste money on things that don’t matter to them but matters to only people around them."

“An investment made without a goal and a plan is like stepping into a train and not knowing where to get off. Investors should make some effort to educate themselves on what they want and why they want to invest," added Katpadi.