Yesterday I received a mail from one of a blog reader requesting me to review his equity portfolio. He started investing from February 2016. All his investments are in DIRECT Funds. This motivated me to write the post.
Before proceeding further, I want to make sure that I am not against DIRECT MUTUAL FUNDS or DIY (Do It Yourself) theory.
I want to link few of these direct mutual fund investors or DIY theory followers to Dunning-Kruger effect. Because these few investors are exactly doing of what it is said Dunning-Kruger effect. Let us know what this effect is.
Dunning-Kruger effect is a cognitive bias theory where unskilled persons suffer from illusory superiority. They try to mistake in assessing their ability. This is one part of this effect. This I purely relate to a DIRECT Mutual Fund Investor.
Further, this theory suggests that highly skilled individuals may underestimate the relative competence and may wrongly assume that the tasks, which are easy for them, are also easy for OTHERS. This I purely relate to a few who are EXPERT but assuming others can also do it easily by investing in DIRECT mutual funds.
The miscalibration of an investor about his ability is an error about SELF. However, the miscalibration of an expert is about others. Investors’ miscalibration is natural, he looks for an expert advice, and he simply follows. However, the danger is when an expert advice so easily that others can also be followed by what he is following. It sometimes leads to a disaster.
This Dunning-Kruger effect was inspired by a study, which is explained in Wikipedia as “McArthur Wheeler, a man who robbed two banks after covering his face with lemon juice in the mistaken belief that, because lemon juice is usable as invisible ink, it would prevent his face from being recorded on surveillance cameras.”
Dunning and Kruger proposed that, for a given skill, incompetent people will do as follows-
Why I linked this theory to this above-mentioned new investor?
Because I felt and I firmly believe that the above reader of whom I mentioned above decided to invest in mutual funds on his own. Saving penny of a commission was in his mind. However, he don’t know of what he is doing and where he is heading. Suddenly, after the investments, he felt uneasy due to negative returns in his portfolio.
Within a month of equity investments, he is turning to be so over-reacting means how can he be long-term investor. Choosing online platform is the best for all gadget savvy investors. I completely support that. However, failing to know of what they are doing or acting with overconfidence leads to danger.
Mr.A may be experts in managing his own money. He may preach to all. However, investors must think about whether they are capable like Mr.A to act, monitor, be patience or adjusted for volatility. I feel it a herd mentality. If one preaches direct funds or DIY theory and he is expert means following blindly of him. If he is investing in XYZ fund means I too invest. If he possesses negative view about ABC fund means I too must have same view. I may say madness at its peak.
At the same time, I am not at all against Direct Mutual Funds or DIY theory. I always suggest my clients or readers to take control of their money today or tomorrow. This is the only solution in this financial world. Because at the end of the day it is your money, you know the risk, you know your goals, you know how much important each rupee is. But not the expert or your fellow friend who is investing in direct funds or following DIY theory.
First, understand your limitations. If you are capable of handling your portfolio, then I will suggest of going for DIRECT or follow DIY theory. Otherwise, simply take an advice of adviser whom you believe can handhold you in long run. Remember the point here that finding a right adviser is also the toughest task on this earth. Be cautious, test his each suggestion, cross-question each recommendation, and finally invest after better understanding. This is the only solution to invest and learn your money properly.
We don’t know when we need money. We don’t know our financial goals. But eager to invest in Mutual Funds. I often face the questions like “I am interested to invest in mutual fund for the period of 5-10 years. Hence, recommend me some BEST funds”. Sadly, they don’t know that 5-10 years is a big gap of 5 years. Investing for 5 years has been different than investing for 10 years. Understand yourself first is a first step of investment. Rest of the calculation, choosing products monitoring will come into picture at a later stage.
Again, I am finally repeating and stressing, if you are capable then go for DIRECT or DIY theory. Otherwise, a big NO.
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Hi sir,
thank you for all the effort you have put in. I have been reading ur blogs and other stuff and started investing in Mfs for past 2 months.
below is the SIP plan for 15 years equity for my goal. Have Debt in PPf and EPf.
franklin bluechip growth direct - Rs.6000/month
HDfc mid cap opp fund growth direct - Rs.3000/month (yet to start)
franklin smaller companies fund growth Direct - Rs.1000/month (yet to start).
Please suggest if the above is fine to proceed.
Also is it ok to have same AMC in the portfolio ? (Read in a blog that different AMCs and fund managers should be chosen)
Dear CCS,
Please go ahead but never forget to do the proper asset allocation and also review of portfolio once in a year.
thanks a lot for the prompt reply.Do you have any blog posts for referring about methods/steps for reviewing the portfolio.
Will be much helpful.
Dear CCS,
There are many but soon I will write a post on this.
Thank you.
SIR, I WAS PLANNING TO GO SIP IN TWO FUNDS HDFC MIDCAP OPPORTUNITIES AND DSP BR MICRO CAP FUND WITH BOTH DIRECT OPTIONS. SHALL I GO AHEAD? CAN I DO SIP IN DIRECT PLANS?
Rajesh-You can do so if you know how to manage and review the funds. But your selection is right or wrong is dependable on your time horizon of goal and asset allocation.
SIR, GOAL IS KIDS EDUCATION AND TIME HORIZON IS 15 YEARS.
Rajesh-Refer my recent post for understand few basics before jumping to investing "Top 10 Best SIP Mutual Funds to invest in India in 2017".
I GOT IT. THANK YOU SIR
I am an NRI 47yrs.accidentally hit your blog almost 1.5yrs back, since then regular visitor.
I did build my profile. kindly advice if anything to add or delete.
HDFC balanced fund – 4k SIP
Tata balanced fund – 4K SIP
HDFC banking and PSU debt -3k
And HDFC balanced 5 lac lump sum.
I did buy a health cover from Star this vacation in July, ICICI term and have PPF 2k monthly. This was done by reading comment sections and my earlier queries with you. All this done during this july/august vacation.
My time horizon is minimum 9 years(my SIP contribution ) & I stay invested until my kids requirement for their education(10&13yrs.age)
Therefore my questions are
1) These funds are enough or need to add more to create 15-20 lac sum in9-10 years, if possible I will top up whenever possible.
2) If unable to continue SIP say after 5 years but stay invested for 10 years without redeeming it will that money grow or better to invest somewhere else
I kindly seek your valuable advice
Ben-1) Retain one balanced fund. Also, you have debt exposure already in balanced funds (35%), then I don't think you need HDFC Banking and PSU Debt and also PPF. A single HDFC or Tata Balanced Fund is enough.
2) You can continue in same even after 5 years (if you are unable to continue).
Hi Basavaraj
I am having an excess money of 15K per month. I am looking to invest some portion of my excess money for buying my car.
Car in 5 yrs -- 9.5L
I appreciate your help if you can guide me on how to invest wrt this goal
Badri-Use short term or ultra short term debt funds.
Dear Sir
I've been investing in the following funds since 2015 September
1. SIP of 2500 in SBI Magnum Balanced Fund Regular Growth
2. SIP of 1000 in ICICI Value Discovery Fund Direct Growth
I've some queries that needs your advice , investment duration is in between 7 to 12 years
1. is it a right Investment Ratio , ie Equity : Debt ? if wrong please advice so that I can modify accordingly
2. Do I need to keep a Large Cap or a Small and Midcap fund too ?
your immediate response is highly appreciated
Thanks in advance
Abhijith-What prompted to review within a year?
Dear Sir
I'm an NRI, and currently I'm on my vacations and this is the right time to review the funds and performances. Also I got to see some queries regarding the equity: debt ratio.
Within this short period of time I would also like to invest either in a large cap or small and mid cap fund.
Would you clarify my queries?
All these investments are for 7-12 years for my Daughter studies and marriage.
Sir
Can you guide me ?
Sir.
Can you pls answer me ?
Abhijith-If your goals are just 7-12 years long, then I suggest 40:60 in debt:equity. For this an existing SBI Balanced Fund is enough.
Abhijith-First define your perfect time of goal, then we discuss.
Awesome work and enjoyed reading your articles.
I am 33 year old married with 2 year old son and having term insurance 50 lakh and 3 lakh health insurance for family
Currently I hold 5 mutual funds namely HDFC prudence, HDFC top 200, ICICI focused blue-chip, reliance small cap and reliance tax saver fund investing 2k each per month. Please advise is the MF allocation is proper or do I need to modify focusing my sons education and his marriage.
Also currently I am living on rent and want to save some money for my house purchase and initial installment. And I can add another 10K in MF. Please advise and suggest where and which is the best way to invest and allocate money for future financial security
Vika-Where is your debt portfolio for kid's education and marriage goal? Also, why you are holding two funds (HDFC Top 200 and ICICI)? Retain one. Without knowing when you need money for house, it is hard for me to guide.
Sir,
1] My age is 23 and i would like to start an SIP of 3000/ month for a period of 3 years, the amount generated after 3 years is to be used for purchase of my first car [down-payment]. kindly suggest me schemes for the stated SIP amount.
2] Further i have surplus 15000 at present and i would like to invest it in debt/ liquid MF Scheme for 6 months. i am planning to use this fund for my vacation trip in Feb, 2017. kindly suggest me MF scheme for the same, or any other alternative that you deem fit.
kindly advise.
RAvi-1) No equity fund suitable for your goal. 2) Use Liquid Funds.
I had invested 2,193/- in Reliance Diversified Power Sector Fund - Retail Plan (Bonus) on 06/09/13. Now the fund value is 4,146/-
Note: Actually in 2010 , I had invested 5000 in Reliance Infra fund which eventually saw losses.So Reliance merged its Infra fund with Power fund around 06/09/13 with a value of 2,193/- whose value is now 4,146
Should I keep this fund or withdraw. Any other fund that I invest in?
Paresh-Without knowing your goal of this investment, how can I guide you?
Hi Suresh
I am 29 Years old and I invest 7000/- per month in SIP out of which I invest 80% in Mid and Small Cap funds and 20% in Large Cap funds.
I want to add 2000/- more in SIP but I am confused whether I should invest in Large Cap(SBI Blue Chip) or Diversified Equity (SBI Magnum Multi Cap) Category?
I have moderate Risk appetite and can keep investing this sum for 4-5 Years.
I want your suggestion from the diversification point of view.
Thanks
Mohit-Equity Mutual Funds are not suitable for 4-5 years term of goals.
I have reaped reasonable benefits in past 4-5 years but I agree that since it is market driven , this can not hold true always.
If I increase the time span little longer to 7-8 Years , can you please suggest me on the diversification?
Thanks
Mohit-First decide firmly of when you need. Flexible or random answers will not work in investing.
Hello Sir,
Requesting to review my MF portfolio.My investment horizon is long term >15 years .
One time investment in ELSS funds -
1.ICICI Prudential Top 100 Fund - Growth - 22,000
2.ICICI Prudential Long Term Equity Fund (Tax Saving) - Direct Plan - Growth -25,000
Ongoing SIP of 5000 each per month from past 15 months
1. ICICI Prudential Focused Bluechip Equity Fund - Growth
2. ICICI Prudential Value Discovery Fund -Growth
I have additional investment bandwidth of around 20-30 thousand per month.Should I increase SIP contributions for existing funds or add new fund ?
Nidhi-ICICI Pru Top 100 is not ELSS fund. The current SIP funds are enough of equity. But where is debt portfolio? If your tenure is 15 years, then I suggest PPF. Manage debt to equity in the ratio of 30:70.
Basavaraj - Thank you for the reply.
Yes I made the mistake while writing, ICICI Pru Top 100 is not ELSS fund.
I forgot to mention have been making contributions in PPF as part of debt portfolio.
And as you observed "The current SIP funds are enough.." Should I up the SIP contribution in existing funds or add 1-2 additional funds ?
Nidhi-For your fresh investment, you can use the same funds. No need to add on new funds for each of your fresh investment.