Mutual Fund as an asset class, is fast becoming popular among Indian investors. But in spite of all the education and content available, there are some very common mistakes that most of us do, while investing in Mutual Funds.
Here is the list of the top 7 mistakes that I found out, after interacting with hundreds of investors from across the country, and outside.
Mistake # 1: Selecting Fund Type [Direct Vs Regular]
- All Mutual Funds (Equity or Debt) are available in two different types - Direct and Regular.
- Direct funds are those mutual fund schemes that are directly offered by the fund house or AMC (Asset Management Company). The names of these funds are prefixed by the word 'direct'. There is no involvement of a third party, distributor, or agent. The investors directly deal with the AMC offering the fund.
- Be very careful when choosing the fund. It should always have 'Direct' in its name.
- If you are managing your Mutual Funds via your trading account, you will only get the Regular type as an option.
- If you cannot find 'Direct' funds on the platform which you are using, it is better to quit the platform itself. It will pay you off in the long run.
- Direct Funds have a low expense ratio, and therefore, higher NAV and higher returns.
- The difference in returns can be in the range of 1-2% per annum, and this can be a significant difference in the long run.
- If you see 'regular' in your fund name, you should immediately liquidate the fund and invest in the 'direct' counterpart (in a lump sum manner, and not via SIP)
[Additional Reading: What are Direct Funds]
Mistake # 2: Selecting Fund Option [Growth Vs Dividend]
- You will always get two options to choose from, when selecting your mutual funds - Dividend and Growth.
- Dividend word sounds very lucrative but is actually a farce. You will read more about this in our upcoming book - Foops
- Dividends make no sense for mutual funds. In fact, you end up paying more taxes (and therefore yielding lesser returns), if you have opted for the Dividend option.
- If you see 'dividend' in your fund name, you should immediately liquidate the fund and choose the 'growth' counterpart (in a lump sum manner, and not via SIP)
- The difference in returns can be in the range of 2-3% and this can be a highly significant difference in the long run.
- Growth option is which compounds your money and makes it massive over a period of time.
Mistake # 3: Selecting the investing platform [Fund House Vs Any other]
- There are so many third-party platforms available in the market nowadays, most of them free.
- These provide you with fancy reports and graphs, but the biggest problem with such platforms is that we tend to lose out on the simplicity of investing.
- All you need a platform is for starting or stopping a SIP and reporting the numbers.
- These simple needs are met directly by the respective fund house websites.
- Your money is not only 100% safe with the fund house (since they are directly governed by SEBI), but everything is free as well as simple.
- With KFintech and CAMS providing consolidated reports cutting across all your investments across all fund houses, it makes absolutely no sense to fall into the lure of any 3rd party platforms.
- Here are the link1 [CAMS] and link2 [KFintech] which you can use to generate a consolidated report anytime for all Mutual Funds (even if they belong to different PANs - like in the case of family members) but mapped to a specific email id.
- Keep your investing life simple, use your time to learn more. Invest directly with the fund house websites.
[Additional Reading: Consolidated Account Statements for MFs]
Mistake # 4: Selecting the investing method [SIP Vs Lumpsum]
- SIP is, of course, the default investing method for mutual funds. It helps average the costs better and its strength lies in its simplicity.
- In some cases, with experience, we can also use the VIP method of investing. [Read details here]
- There are many situations where both SIP and VIP may be in fact harmful to our wealth. In such cases, we must ensure that we do lump sum investments. e.g. one of the cases is when you are moving from a regular to a direct fund or dividend to a growth option. There are many more such scenarios in which SIPs are better avoided. You will read a lot about those in our upcoming book - Foops.
[Additional Reading: VIPs perform better than SIPs]
Mistake # 5: Running after returns
- This is one of the most common mistakes in mutual fund investing.
- Small-Caps may be giving close to 100% returns today, but if you invest just in small-cap funds, you will end up on the losing side just in a few month's time.
- The decision to invest in a particular type of fund is driven by your investing strategy and not by the funds that are currently yielding higher returns.
- And ofcourse, your investing strategy is driven by not only the needs of returns but also of regular cash flow, liquidity and stability.
Mistake # 6: Opting for Close-ended funds
- There are many investors, actually, quite a significant number of them, who opt for close-ended mutual funds.
- Close-ended mutual funds have a pre-defined entry and a pre-defined exit date.
- No one can invest in between these two dates (and that's why the word 'closed')
- Such funds defeat the very purpose of cost averaging in a volatile investment like mutual funds.
- Since there is no averaging, the risks are very high, and you have to be fortunate enough to be entering in a low market and exiting in a high market.
- Never ever opt for close-ended funds. Read more about them in the upcoming book - Foops.
[Additional Reading: Open-ended Vs Close-ended funds]
Mistake # 7: Opting for NFOs
- New Fund Offers (NFOs) attract mutual fund investors, much the same way as IPOs in the stock market.
- But the fact remains that they are even more worthless than IPOs.
- Why should anyone invest in a fund with no proven track record when so many other options are available?
- Of course, there are some rare and genuine reasons to go for NFOs. You will read more about them in the upcoming book - Foops. But for average investors, they are a strict NO.
These are the top 7 mistakes that mutual fund investors keep repeating. Just awakening to these mistakes and taking action would have a significant impact on your wealth.
Regards
Manoj Arora
Official Website
Good analysis,Mr.Manoj.Thanks.
ReplyDeleteThanks my friend.
DeleteThank You Manoj... Really helpful...🙏🙏🙏
ReplyDeleteCheers Rahul
DeleteVery informative and proper guidance.
ReplyDeleteThank you, my friend
DeleteIt's very insightful. Thank you.
ReplyDeleteThanks Pemba
DeleteExcellent insight, would surely be careful next time, thanks sir, it's really helpful
ReplyDeleteWhy only next time my friend. One can and one should correct the existing mistakes, if done.
DeleteAwesome and quite informative
ReplyDeleteThanks sumit
DeleteAwesome and informative article
ReplyDeleteThanks buddy
DeleteYour text is so clear and clicking...!! Not that I did not know at all the difference between Direct and Regular, but somehow I still went with the third party account. And not always by the fund house. Feels like taking out all those investments that are in Regular (via third party account) and investing them directly from the AMC site. Will that be good? Now? Because the investments have been happening since past 2-3 years and NAV value is higher now compared with 2-3 years back. So now if I release from third party and reinvest lumsum in AMC site I will get the current NAV...Right? Will that be beneficial?
ReplyDeleteDear Abhivyakti.
DeleteTake action, today itself. Every day of delay is money lost. And when you move from equity to equity, the movement is market neutral (you will read more about it in the upcoming book - Foops).
Act today.
Don't delay.
Regards
Manoj
Thank you sir, for your help
ReplyDeleteits a mutual pleasure, my friend
DeleteThanks sir
ReplyDeleteCheers Sameer
DeleteVery good points Manoj
ReplyDeleteThanks Arun
DeleteIt's a great advice in simplest words even for mature investors who keep on making such mistakes. Thanks for guidance.
ReplyDeleteThanks and Cheers, my friend
DeleteThanks Mr. Manoj for the blog. I made this 'mistake' few years back. However some of these investments are tax savings funds and thus difficult to come out before 3 years. But definitely rest of the funds ,I can salvage.
ReplyDeleteTrue Uday.
DeleteDo what's in your hands. Act on whatever you can.
Hi Sir , hope all well !
ReplyDeleteWe as an investor in MF definately do commit mistakes as stated clearly and simply by you but not bother much about its consequences and how much money we loose in long run in the absence of proper guidance. Normal practice is indirect route only while investing into MF as most of us are unaware about its disadvantages in long run. Thanks for presenting useful facts in a very understanding manner. Looking forward for more such learning in future too. Regards..
My friend,
DeleteAs long as it helps you in taking action, i feel my efforts are successful
Regards
Manoj
where to find the right mutual fund?
ReplyDeletewhat is the issue of using coin by zerodha?
I can suggest you the right mutual fund for you, once I understand your investing strategy. You may re enter the elite program when the next batch opens in Aug 21.
DeleteReg zerodha, the whole point is why to depend on any 3rd party for investing in mutual funds. Why not invest directly with the fund house?
Thats amazing and very useful reading Sir. Thankfully, we being directly mentored by you, we need not worry much about selection of MFs.
ReplyDeleteThank you so much Mentor.
It's a pleasure, Ankur.
DeleteInteresting read....Sir, when are you publishing your new book Foops, eagerly waiting to read and gain more insights !!!
ReplyDeleteMarch 2022
DeleteSir, I was routed to this blog from Elevate Sep 2023 edition. After reading it, I felt pity on myself for my financial ignorance. This is an eye opener and I too form the part of crowd who opted for REGULAR plan rather than DIRECT. As suggested by you, I want to shift today but I think I would be making another mistake if I switch without acquiring indepth knowledge about DIRECT fund. Sir, kindly suggest way ahead in acquiring wisdom about mutual funds.
ReplyDeleteRegards
The best way to learn such nuances in personal finance would be to read the book FOOPS and enrol for the upcoming Elite Program batch starting 25th dec. All details here...
Deletehttps://elite.manoj-arora.com