Dear Readers,
We all have heard of how well markets have performed in past few years. Also, The Assets under management of the mutual fund industry grew 30% – from Rs. 16.46 lakh crore in December 2016 to Rs. 21.37 lakh crore in December 2017.
Given the enthusiasm of the investors, it is important to be cautious. Often the investors invest in Equities or Balance funds for the sake of Dividends, or seeing the single digit returns from Debt Funds, shift to high yield credit opportunities funds without understanding the Risk factors, or often invest in funds for too short term period.
We, at RichVik, are presenting a small article on 5 Mistakes to avoid while investing in Mutual Funds.
1. Investing in SIPs for a short period:
SIPs in Equity Funds are largely based on stock markets, and it is important that due time be given to them to give good results.
Historical data of SIP performance provides enough evidence to justify this strategy. Between April 1997 and March 2000, a monthly SIP of Rs 10,000 in Franklin India Prima Plus would have grown to a whopping Rs 10.41 lakh—an annualized return of 82.5%. If, lured by the high returns, one had started a fresh SIP in the same fund in April 2000 and invested until March 2003, the Rs 3.6 lakh investment would have only grown to Rs 3.8 lakh—3.6% annualized return.
| SIP TENURE | CAGR | AMOUNT INVESTED | FINAL CORPUS | |
| PERIOD OF HIGH RETURN | Apr 1997 – Mar 2000 | 82.50% | 3.6 Lakh | 10.42 Lakh |
| LOW SUBSEQUENT RETURNS INITIALLY | Apr 2000 – Mar 2003 | 3.6% | 3.6 Lakh | 3.8 Lakh |
| IMPROVING RETURNS DUE TO LONGER PERIOD | Apr 2000 – Mar 2005 | 36.10% | 6 Lakh | 14.46 Lakh |
| PERIOD OF HIGH RETURN | Jan 2008 – Dec 2010 | 25.80% | 3.6 Lakh | 5.24 Lakh |
| LOW SUBSEQUENT RETURNS INITIALLY | Jan 2011 – Dec 2013 | 11% | 3.6 Lakh | 4.25 Lakh |
| IMPROVING RETURNS DUE TO LONGER PERIOD | Jan 2011 – Dec 2015 | 19.80% | 6 Lakh | 9.81 Lakh |
Source: Economic Times
The above mentioned table is a chart showing returns for Monthly SIP amount of Rs. 10,000 in Franklin India Prima plus Fund. Analyzing the tables, we can see that even though there were low returns in the years 2000-2003 and 2011-2013, market have corrected themselves in a time span of year or two and given out better returns in long term of five years.
2. Too much exposure to Mid or Small Cap Funds:
With 23% and 17% annualized return over the past three years respectively, mid and small-cap funds have comfortably beaten multi-cap and large-cap funds. This superior performance could easily tempt investors to bet big on this segment. It is advised against hiking exposure to this segment. It has the potential to deliver high returns, but exhibits much higher volatility and is particularly vulnerable when markets turn sour. At a broader level, there is a perception that valuations in these segments are stretched. Several funds have recognized this problem and, to protect their return profile, have stopped accepting fresh money.
3. Pausing/ Stopping SIPs when prices are rising:
Data from the Association of Mutual Funds in India (AMFI) shows that investors sold equity fund holdings worth Rs 1.9 lakh crore in 2017—45% higher compared to 2016. Some investors have chosen to book profits entirely while few have even paused their SIPs amid rising prices of the shares/ units. However, this may prove harmful in the long run since there is a possibility of a correction in the stock market in the near future, which may sour the experience for investors who have enjoyed a good run in their SIPs for the past few years. However, redeeming your investments, in anticipation of a correction, may rob your portfolio of the compounding benefits on the accumulated corpus, and could even result in a shortfall in your target corpus for time bound goals.
Let us see that with an example. If a person invests Rs. 5000 for 120 months in ICICI Prudential Value Discovery plan regularly, without any breakage, even when the prices are rising, the amount invested of Rs. 6,00,000 has grown to Rs. 17,98,000 with 21% returns. On the contrary, if the investor had invested only when the Price-Earnings Ratio of NIFTY was below 20, even when the investor had the capacity to invest in monthly SIP of 5000 regularly, the sum invested by him would have been Rs. 3,95,000 and the maturity value would have been Rs. 13,83,000 only. Thus stopping your SIPs in untimely manner, or investing only when market prices are decreasing robs you from higher returns.
| PARTICULARS | FUNDS RETURNS | AMOUNT INVESTED | CORPUS GENERATED |
| Regular SIP | 21% | 600000 | 1798000 |
| SIP only at low valuations (NIFTY PE BELOW 20) | 22% | 395000 | 1383000 |
Source: Economic Times
4. Choosing dividend option for regular income:
Often the investors go for Dividend option of Mutual Fund in order to have regular flow of income. Several Balanced Fund offer dividend option on monthly or quarterly basis, however the dividends are surplus or profits which are distributed to the investors. However, there is no guarantee that funds will be able to sustain the quantum of payout. A better option for investors who need regular income is to opt for growth plan of balanced funds and initiate a systematic withdrawal fund (SWP) after a year.
SWP guarantees a steady income and let investors customize the income as per their needs. On the other hand, dividends are at the discretion of the fund house and could fluctuate with the Fund’s performance.
5. Shifting to Direct Plans without the help of an Advisor:
Direct Plans of Mutual Funds allows the investor to purchase a scheme directly from the fund company at a lower expense ratio than under “regular plan”. But investors who are not well versed with mutual funds and capital markets should avoid taking this route independently. If you opt for the do-it-yourself approach, then it is not just the paperwork that you have to handle; the onus of picking the right funds suited to your specific needs, tracking their performance and reviewing the portfolio at appropriate time is entirely on you. This is easier said than done. There are approximately 10,000 types of Mutual Fund Schemes in existence, and it is difficult to choose amongst them on the basis of investor’s need and goal tenure.
Thus, it is always advisable to take an advisor’s help before investing in funds.