Avoid these dumb ways of selecting a Mutual Fund scheme

Nutan Gupta

16 Dec 2016

Usually, when a person starts investing, he starts off with mutual funds. Mutual funds give an investor a lot of exposure to different sectors and industries without letting him pick an individual stock. Choosing a wrong mutual fund can burn a big hole in your pocket. So, it is very important to choose a mutual fund wisely.

Here’s a look at some of the mistakes one should avoid while selecting a mutual fund:

Assuming that lower NAV is better

A lot of investors believe that investing in a mutual fund with lower NAV is better. However, this is not the case. NAV is not a parameter which should be taken into consideration while making an investment. Let us understand this with an example:

  Fund A Fund B
No. of shares purchased 100 units 50 units
NAV Rs. 50 Rs. 100
Total Amount Invested Rs. 5,000 Rs. 5,000
Return in one year 10% 12%
New NAV Rs. 55 Rs. 112
Total Returns Rs. 5,500 Rs. 5,600

In the above example, an individual invests the same amount in two different funds with different NAVs. Assuming that Fund A has given a return of 10% in one year, and Fund B has given a return of 12% during the same period, the total returns generated by the funds are different. So, NAV does not play any role in a fund’s performance.

Chasing Past Performance

While analysing past performance of a fund is one of the important aspects one must consider while investing, paying too much attention to it can ruin your portfolio. One must understand that past performance does not mean future performance and the fund will not continue to give the same returns in future. One cannot deny the fact that past performance helps in understanding the performance of the fund, but it is not the only reason based on which one should invest.

Too much attention on short-term performance

Different asset classes provide different returns at various stages of economic cycles. Some stocks tend to perform better than others based on the sector performance over a specific period of time. However, things change drastically over a longer period of time. It is always better to look at a fund’s 3-year, 5-year and 10-year performance rather than looking at its 1-month or 3-month performance. A fund’s short term performance is usually influenced by the performance of sector funds.

Invest in order to save taxes

Investments up to Rs. 1,50,000 are exempt from tax under section 80C of the Income Tax Act. Most of the investors invest money into mutual fund schemes during the month of February and March in order to avail tax benefit. However, this is not the right approach towards investing. Investment should be done on a regular basis. Also, one needs to know that not all mutual funds qualify for tax exemption. One needs to invest in ELSS in order to avail tax benefits, which comes with a lock-in period of 3 years.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Avoid these dumb ways of selecting a Mutual Fund scheme

Nutan Gupta

16 Dec 2016

Usually, when a person starts investing, he starts off with mutual funds. Mutual funds give an investor a lot of exposure to different sectors and industries without letting him pick an individual stock. Choosing a wrong mutual fund can burn a big hole in your pocket. So, it is very important to choose a mutual fund wisely.

Here’s a look at some of the mistakes one should avoid while selecting a mutual fund:

Assuming that lower NAV is better

A lot of investors believe that investing in a mutual fund with lower NAV is better. However, this is not the case. NAV is not a parameter which should be taken into consideration while making an investment. Let us understand this with an example:

  Fund A Fund B
No. of shares purchased 100 units 50 units
NAV Rs. 50 Rs. 100
Total Amount Invested Rs. 5,000 Rs. 5,000
Return in one year 10% 12%
New NAV Rs. 55 Rs. 112
Total Returns Rs. 5,500 Rs. 5,600

In the above example, an individual invests the same amount in two different funds with different NAVs. Assuming that Fund A has given a return of 10% in one year, and Fund B has given a return of 12% during the same period, the total returns generated by the funds are different. So, NAV does not play any role in a fund’s performance.

Chasing Past Performance

While analysing past performance of a fund is one of the important aspects one must consider while investing, paying too much attention to it can ruin your portfolio. One must understand that past performance does not mean future performance and the fund will not continue to give the same returns in future. One cannot deny the fact that past performance helps in understanding the performance of the fund, but it is not the only reason based on which one should invest.

Too much attention on short-term performance

Different asset classes provide different returns at various stages of economic cycles. Some stocks tend to perform better than others based on the sector performance over a specific period of time. However, things change drastically over a longer period of time. It is always better to look at a fund’s 3-year, 5-year and 10-year performance rather than looking at its 1-month or 3-month performance. A fund’s short term performance is usually influenced by the performance of sector funds.

Invest in order to save taxes

Investments up to Rs. 1,50,000 are exempt from tax under section 80C of the Income Tax Act. Most of the investors invest money into mutual fund schemes during the month of February and March in order to avail tax benefit. However, this is not the right approach towards investing. Investment should be done on a regular basis. Also, one needs to know that not all mutual funds qualify for tax exemption. One needs to invest in ELSS in order to avail tax benefits, which comes with a lock-in period of 3 years.

Have Referral Code?