8 of the Most Common Investment Mistakes in Mutual funds

8 of the most common investment mistakes in mutual funds
Mutual funds have been in the news ever since the Mutual funds Sahi hai advertisement has been all over the new. People have been shifting their funds from the traditional fixed deposit to mutual funds.  If you don’t have good knowledge of the markets or don’t have too much time to follow the markets, you can invest in mutual funds. Best part of mutual funds? They are managed by professionals and you can start with an amount as low as Rs 500 Although there are so many advantages of investing in Mutual funds, novice investors still tend to make a lot of mistakes. Let’s discuss 8 Common mistakes which most investors make.

1. No financial goal: Investing without having a goal is like shooting in the dark. Most investors don’t know for what purpose they are investing. You should clearly define your financial goal before investing. If it is a long-term goal of retirement, investing in SIP would make sense and if it is a short-term goal of enjoying a foreign trip in Europe, debt funds would do a good job. 

2. Reacting to short term fluctuations:  We as human beings tend to react to every single news that we hear. Avoid listening to analysts on business channels and taking tips from various sources. If you don’t avoid all this earning return would become tough and you would just be buying and selling continuously instead of generating long term wealth. 

3. Not increasing SIP amounts: SIP is a great way to begin your investing journey. However, a mistake that most investors make is that they don’t increase the SIP amount over a period. If your income is increasing, make sure it reflects in your SIP as well

4. Investing in too many schemes: Investing in too many schemes becomes very difficult to monitor. Investing in a mix of 5-6 schemes should serve your purpose. Beyond a certain point investing in too many schemes does not add any value. The more schemes you add the more you need to track them in terms of performance.

5. Staying away from a mutual fund because of high NAV: Many new investors often make the mistake of comparing mutual funds based on their NAV. Higher or lower NAV is irrelevant while determining the performance of a fund. Mutual fund performance is dependent on the portfolio of securities and fund manager’s performance. For example, two funds having a NAV of Rs 10 and Rs 100 that hold the same securities will deliver the same returns. 

6. Not reviewing your portfolio:  Among the investors who invest in the market regularly, only a few them track their investments periodically. If you review the performance of your portfolio timely, it would keep you aligned with your financial goals. Lack of periodic evaluation of funds results in keeping your portfolio filled with junk investments which keep pulling your portfolio returns down.

7. Deciding based on past performance: Past performance is not an indicator of future performance. If any agent tells you that a mutual fund has given 40-50% returns last year and suggests you invest in the same, then it is a red flag and you need to be aware. Nothing wrong in checking past performance of mutual funds, but that should not be done in isolation. Check fund manager’s objectives, AMC’s track record and taxation. 

8. Dilemma of dividend funds: Mutual funds come with two option – growth and dividend option. Unlike in stock dividends where the company pays a part of their profits, which becomes an additional income for you. In mutual funds there is no additional income as such, you are paid from the growth in your investments itself, so it becomes a regular income for you and not an additional income. Many investors believe that they receive an additional income similar to stock markets, however that is not true. After payment of dividend amount, the amount gets reduced from the NAV. So, if your NAV is 100 Rs and dividend paid is 10 Rs, post divided payment it will become 90 RS. 

What are the risks involved in Mutual funds?

What are the risks involved in mutual funds?

Mutual funds have turned out to be a great investment option over the past few years. However, there are some investors who are still not able to shift from the traditional investments like fixed deposits, reason being the risks associated to these investments.

Mutual funds are subject to market risk – please read the scheme related documents carefully

1.Market risk: Market risk is the risk related to those factors which may result in losses for investors due to a poor performance of the stock market. Your investments were worth 15 lakhs 6 months ago, then they declined to 12 lakhs and now they are up 20 lakhs.  The stock markets can make your heartbeat faster; this is what market risk is all about.  As a layman how do you mitigate this risk? Well before investing in equity related mutual funds look at the price to earnings ratio (P/E Ratio), if this ratio is high don’t invest in equities and shift to a safer avenue

2. Credit Risk:  Credit risk is related to debt mutual funds which mean that the issuer of the scheme is unable to make payment of principal and interest. Let’s say you lend money to your friend and he is unable to pay you the money back, you are exposed to credit risk. Debt instruments are always given a rating by rating agencies like CRISIL such as (AAA, AA+, AA) You should always do a detailed study about portfolio characteristics held by the debt mutual fund scheme and you must ensure that the fund manager invests in AAA rated securities. A Lower rated debt scheme (C, C-, D) are more exposed to credit risk. 

3. Interest rate risk:   Interest rates and prices of bond are inversely related. When interest rates go up, price of a bond falls. Similarly, when interest rates decrease, price of a bond hikes up. Debt funds of shorter maturity like liquid funds, short term funds etc are less prone to interest rate risk as compared to debt funds with longer maturity. 

4. Liquidity Risk:  In mutual funds, like ELSS (Equity Linked Saving Scheme) the lock-in period freezes your liquidity which results in liquidity risks.  Liquidity risk normally arises in close ended schemes, where there is less liquidity and you are forced to sell your fund at a discount. Hence it is advisable to invest only in open ended schemes which have a high amount of liquidity.

5. Inflation risk:  The reason most of us start investing is to earn returns and beat inflation. But at times our investments don’t fetch us enough returns to beat inflation. This is especially true in money market funds, where the returns are low and can easily be beaten by inflation.

Direct vs Regular Mutual fund – Which one is better?

Direct vs Regular mutual fund – which one is better?

There are two types of plans in mutual funds – direct and regular

What is Direct Plan in Mutual funds?

A Direct Plan is when you buy directly from the Mutual Fund Company. In a direct plan there is no distributor/broker involved so investors are free from distribution or commission fees. Because of this the expense ratio is low in direct plans. 

What is Regular Plan in Mutual Funds?

A Regular Plan is when you buy through an advisor, broker or distributor (Intermediary). As there is an intermediary involved, they get paid a commission which makes regular plans much more expensive than direct plans.


Prior to 2013, Mutual funds were bought and sold only through a distributor/agent since it was thought that the general public lacked awareness. Such funds carried an extra charge as the mutual fund company had to pay a commission to the distributor.

In 2013, SEBI passed a new regulation which made the mutual fund companies to sell the funds directly to the investors, so that they could invest without being charged a commission.

Difference between Direct Plan and Regular Plan:

1)Expense RatioA direct plan has no commission to be paid hence the expense ratio is lower A regular plan has a higher expense ratio as it requires a commission to be paid to the distributor
2)ReturnsThe returns in direct plans are usually high as there is no third-party involvementThe returns in regular plans are lower as there is distributor/agent who will be charging a commission
3)Market ResearchIn a direct plan, research is done by the investor himselfIn a regular plan, research is done by distributor/agent and he gives you advice regarding your investments
4)NAVNAV of a direct plan is higherNAV of a direct plan is lower
5)Portfolio TrackingAs the investor does the research, portfolio monitoring is done by the investor himself. Distributor/agent does the portfolio tracking on behalf of you. 

So, the question is, which plan is better for you: direct plan or regular plan?

Both plans are the exact same scheme, run by the same fund manager investing in the same stocks and bonds. The difference is that in case of direct mutual funds, there is no broker/distributor commission. Which means, as an investor, you get higher returns from the exact same mutual fund.

You should try sticking to a direct plan, reason being, in regular plans many of the distributors/agents can misguide you in buying the wrong investments, so they get paid a higher commission. A look at the consumer forum will tell you how many people complain after being cheated. However not all agents are fraudulent, but it does not change the fact that their compensation is based on your investment amount.

Investing in a direct plan will demand you to put in some required efforts, but in the long run it will benefit you

However, direct plan will give you an additional return of 0.5 – 1%, which makes a huge difference over a period of 15-20 years.

7 steps to select the right Mutual Fund

7 steps to select the right mutual fund

Selecting the right Mutual fund is like selecting the right partner; any wrong decision can put you in a spot of bother.   As a new investor you may find it even tougher as there are so many funds to invest in. 

When we say we need to select the best mutual fund for us, it does not mean the one with the best returns, but the one which suits your goals and the amount of risk you can take. Many investors make the mistake of choosing a mutual fund based on past performance, if a mutual fund has been the best performing one in the last year, it does not mean it will continue to do the same. Some investors only look at the ratings given by various research agencies. This can be one parameter to be looked at, but there are many other parameters that one should look into before investing in a mutual fund.

1. Investment Objective:  Firstly, you need to understand your purpose behind investing. You may be investing for a long term or short-term goal or for a specific goal like child’s marriage or education, foreign trip with family, purchase of a new car or house. Investing in mutual funds to get better returns then saving account and fixed deposit can also be a goal. Read the scheme related documents carefully and understand the investment objective of the mutual fund scheme and check if it is in line with your objective

2. Risk Tolerance: Investment decisions are taken based on risk appetite. A person in their mid-twenties would be a high-risk taker and invest in equities whereas a person who is likely to retire soon would prefer safer investments like debt funds. To make investors aware of their risk profile, SEBI in 2015, made it mandatory for all mutual funds to display a RISKOMETER, showing five levels of risk.

3. Performance comparison: Mutual fund returns should be compared to a benchmark’s performance and other schemes in the same category which will give a better understanding of the fund’s performance. For eg: If you have invested in a large cap equity fund then your basis of comparison will be other large cap funds in the same category and not mid cap or small cap funds.

4. Consistent returns: Mutual funds giving consistent returns over a period of 3-5 years should be considered as investments. Don’t look at the investment performance of just 1 year, there are many schemes which have good ratings and good returns in 1 year but poor returns over a period of 4-5 years.

5. Expense ratio: Expense ratio is the fee charged by an AMC for maintaining all the expenses for running the mutual fund which include the administration, management, promotion and distribution of a mutual fund. According to SEBI, mutual funds can charge 2.25% of the total funds’ assets as expense ratio. However, most equity mutual funds charge around 1.5% which is considered as good by industry experts. Higher expense ratio will reduce your profits and increase your losses.

6. Fund manager tenure and experience: Fund manager is the one who takes most decisions while managing the fund. You should know who the fund manager is and is past track record. Keep yourself updated with other funds that he is managing. However, if the fund manager has recently been changed, don’t panic, track his performance on a quarterly basis. If you find out that the decisions taken by fund manager effects the fund considerably and does not suit your risk appetite, then you can take a decision to exit.

7. Assets Under Management: You can compare the fund size with that of its peers within the same category. Choose the one that is neither too big nor too small. Too big a fund makes it difficult for the fund manager to effectively generate returns and too small a fund shows that the fund is not that popular.