Categories: Mutual Fund

Mutual Fund Investors in India – Some unknown mistakes

I am writing this post after receiving so many doubts and questions related mutual fund investments. The Mutual Fund Investors in India commit so many mistakes which they never notice them as mistakes. Hence, I thought to list them in detail.

# Invest because of peer comparison

Recently I received a mail from a reader that his friend has invested in equity mutual funds since 5 years. Returns are around 20%. His friend showed his fascinating investment history to this guy. Therefore, now he is also very much eager to invest in mutual funds (specifically in equity mutual funds) where his friend invested.

But he does not know why his friend investing, what is his risk taking capacity, what prompted him to invest in equity mutual funds since 5 years and whether his style suitable to him or not. A blind following and starting of investing in equity mutual funds or in any product.

Such type of investment is called as decisions based on peer comparison. We never understand what is best for us. But we compare our friends, relatives or colleagues and jump into investing.

It is such a dangerous mistake, which many Mutual Fund Investors in India unable to understand. I tried to represent such acts in below image.

# No specific financial goals set

First, I receive queries regarding which product to invest. They need a specific product name from me. However, when I question them about the time horizon of the goal, then their answer is so random that it scares me to suggest anything.

The tenure of their financial goals is like 5-10 or 15-20 years away from today. But sadly they don’t know that there is a BIG 5-year gap in their assumptions of goals.

It is hard to suggest or guide anyone who don’t know the exact tenure of their financial goals. However, in a few cases, I can understand that we have to assume but can’t specify perfectly. But what if all goals are so random.

# Attraction towards short term equity returns

Just observe the below image.

Here, I took HDFC Top 200 as an example. Because it is in the market since 3rd September, 1996. You notice that returns of 3 months are shown as 16.88% and 6 months as 30.5%, which is very, very impressive than the returns of 5 years (14.46%), 7 years (13.58%) and 10 years (14.57%).

Six months returns showing 30.5% returns. Which product in India gives us 30% returns for 6 months of investment? So we MUST invest in HDFC Top 200 Fund, am I right?

Hold on….this is where many of us make mistakes. We forget the first thumb rule that equity investment is for long term (in my view if your goal is 5+ years). The second mistake what we do is eye-catching short term returns. So we jump and invest in such equity funds with an expectation of around 30% for 6 months of investment.

We assume that equity is not good for the long term. But definitely best products for the short term. However, the reverse is true. When you assume a 30% return for 6 months of investment, you must be ready to expect the negative return of 30% also. Are you ready? If so, then go ahead. Either you receive +30% or -30%. Sadly we fail to understand the risk and volatility in such short-term equity market.

Note-Less than a year returns are absolute returns and more than a year returns are expressed in CAGR.

# Holding too many funds or too less funds

I noticed that a few have 1-2 financial goals. But holding 10-15 equity funds. But at the same time, few holding only one equity fund like sector funds. I am not against the person who hold a single fund like an equity-oriented balanced fund, which gives you enough exposure to debt and equity. However, I found that few are holding sector funds as they are very much optimistic about the particular sector. But they forget that any negatives about particular sector means they must be ready to bear the heat of negative returns or loss in their portfolio.

Holding too many funds create overlapping. At the same time, holding a single fund for the sake of fancy returns is also not good.

# No proper Asset Allocation

In 99% of mutual fund investors, I found no proper asset allocation. It is may be due to  illiteracy towards investment or scarcity of proper guidance. I found that many investors investing 100% of their investable surplus in equity. Because their goals are long term. Hence, why to satisfy for less by investing in other asset class (like debt).

During the period of the bull run, all experts or funds give you positive news. However, the real test will be when there is a downtrend in the market or free fall in the market. During such falling market, the asset allocation will protect you.

If you have the proper debt to equity exposure based on your timeframe of goal, then it is always the best investment strategy.

# No proper expectation from investment

Everyone running behind BEST returns. But they don’t know or hard to fail to define what is BEST return. For me, it may be 10%, for others best returns means 30%. First, you must define your expected return from your investment. Also, such expected return must not be any fancy number. It must be realistic. For example, from equity, you can expect a 12% return (for long term goals) and from the debt, it may be around 7%.

If your funds are generating the expected return, then you no need to worry about other funds star ratings or returns. Because you are getting what you are expecting. So why to worry??

# Debt Funds are safe but equity funds are unsafe

It is the biggest mistake many investors believe and start to invest in debt funds like Income Funds or Long Term Gilt Funds. However, while selecting debt funds, you must concentrate on two aspects.

  1. Modified Duration-It is measured in years. It is the measurement of interest rate sensitivity of a fund. Let us say, if the modified duration of a fund is say 4 years, then for every 1% interest rate movement, the bond price may move 4%. Higher the modified duration means higher the volatility.
  2. Average Maturity-This means the average maturity period of a portfolio of all bond papers the fund is holding. The higher the average maturity, higher will be the interest rate risk.

So you must understand the risk involved in debt funds. Funds like Income Funds or Gilt Funds are riskier than Short Term, Ultra-Short Term or Liquid Funds.

However, it does not mean that Short Term or Ultra Short Term Funds are safest. But the volatility will be lesser. We may easily compare the volatility of Liquid Fund to Income Fund from below images.

I selected above fund because I can show you the return movement of long term. Because this fund was launched in the year of 2001.

See the return lines of Birla Sun Life Gilt Fund. Compare this volatility with the liquid fund volatility. You notice the difference. Below is the modifified duration and average maturity of both liquid fund and income fund.

Modified Duration of Reliance Liquid Fund-Cash Plan-0.11 Vs Modified Duration of Birla Sunlife Gilt Fund-8.33.

Average Maturity of Reliance Liquid Fund-Cash Plan-0.12 Vs Average Maturity of Birla Sunlife Gilt Fund-15.91.

Hence, if you have enough equity exposure, then try to restrict your investment to short-term or ultra short-term debts or to the maximum of Gilt Short Term. But don’t go beyond that.

Recently, I came across this below eye catching advertisement about Liquid Funds.

This is something called weekend investment. Seems to be eye catching. Such returns may or may not be possible. However, the advertisement perfectly shows how much returns you will generate. Liquid funds over a year may generate 9% or less than your savings account also. The above advertisement not explaining of on what basis they arrived at this final value. So never ever believe on any one. Especially if someone claiming GAURANTEED returns from mutual funds (whether it is debt funds or equity funds).

BasuNivesh

View Comments

  • Dear Basu,

    Your blogs are really helpful and informative. Keep sharing your thoughts.

    I am planning to start a separate MF portfolio for my wife. She currently has savings of 1 lakh and the investment time frame is 12 years. Planning to increase the amount slowly.For Debt i am planning to invest seperately in PPF and BL Sun life MIP II wealth 25 Plan

    1) Currently I have shortlisted below funds by referring Value research online ,Money control and various blogs
    Large Cap (50%): BL Sunlife Top 100 or Mirae Asset India opportunities
    Mid Cap (25%) : Hdfc Mid Cap opportunities or Principal emerging blue chip fund or Mirae asset blue chip
    Small cap (25%): Franklin Smaller cos or L&T emerging business funds

    Please review and provide your suggestions on the above list and any other funds apart from the above list is absolutely fine.I am going to choose one from each large/mid and small cap based on the suggestions.

    2) Is Bulk investing good idea and is it the right time to invest or should we need to wait couple of months for MF consolidation

    3) For some of the funds (Hdfc Mid cap,HDFC Top 200,BLSL Frontline quity,Icici discovery & HDFC Balanced) the AUM size is > 15000 CR. Is it going to be any risk due to increase in AUM or this AUM increase is not a concern.

    Thanks
    Dandu

    • Dandu-1) Goal is 12 years, then how can you manage with PPF? Also why MIP where you find some equity portion? Why not pure debt funds like Short Term or Ultra Short Term Debt Funds? Regarding your choices of equity, my suggestions are BL, HDFC and Franklin.
      2) If the goal is of long term and did proper asset allocation then you can invest NOW also.
      3) In what sense you felt the AUM size is BIG? Compare with other funds of global, you find where you are.

  • Hi Basu Sir,

    My Father is 58yrs old , has retired few months back and received around 3lacs as his entire life saving. Now he wishes to have a monthly income for reasonable self sufficiency.

    But i guess, putting this money in Banks alone wont generate enough income. I am thinking about POMIS but Can you please suggest other a suitable investment products as well which can give reasonable and stable monthly returns ?

    can you please help me with this?

      • Hi Basu Sir,

        Thanks for your valuable advice. But as he is 58yrs old, he is not senior citizen,
        so I guess he is not eligible for next 20months atleast.

        1. So can you please suggest for alternate available products for this duration?
        2. will it be a good idea to invest in any MIS mutual funds? If yes, which funds should are dependable?
        Coz For me security and stable income for him is main concern

        Really looking forward to your advice?

        Thanks

        • Kapil-If his concern is to protect the principal and also depending on the monthly income, then Post Office MIS is fine. MIS of MF will not guarantee you the return. Also, such funds have small exposure towards equity. Does he ready for such volatility?

  • Dear Sir,

    This is my portfolio. I am investing 60k per month in MF for past 1.5 years, and I want and I will invest till 2028. Also, my husband is investing 3 Lakhs in debt relates (PPF/FD's/NPS etc), so in total equity exposure of 720000/- and debt of 300000. Is it the right way to go sir? Would greatly appreciate your inputs.

    1. SBI Blue Chip - 15000/-
    2. AXIS ELSS - 5000/-
    3. SBI Pharma fund - 10000/- (Highly risky, but i am prepared to believe in Pharma as a sector)
    4. DSP Blackrock micro cap - 10000/-
    5. Mirae asset emerging bluechip - 10000/-
    6. Franklin smaller cos : 10000/-
    (or)
    7. Principal emerging - 10000/-

    with respect to funds 6 & 7, i invest every alternate months, so 6 month sin Franklin and 6 months in principal. I have also checked the overlapping of MF's and I dont see big overlapping. Would greatly appreciate your comments sir.

    • Ramya-Avoid sector funds. Whether your PPF and NPS be ready for withdrawal exactly at 2028? If so then go ahead. Otherwise those products not required. Also, in NPS which option you selected?

      • Thanks for ur kind response, PPF matures at 2029. So instead of sector funds, can I add the monthly amount allocated for sector in to SBI blue chip sir? My NPS account is tier 2 and my husband's is Tier 1.

  • Hi Basu,

    Thanks for this informative article.
    Below are mutual funds that I own as of now with their allocation.

    BNP Paribas LT Equity Fund(G) 1000
    Franklin India Prima Plus Fund(G) 1500
    HDFC Balanced Fund(G) 12000
    SBI BlueChip Fund-Reg(G) 1500

    Which makes the total SIP as 6000

    I am planning to buy 2 more funds with SIP of 4000 (making total as 10000)

    Mirae Assest Emerging blue chip
    DSP Blackrock micro.

    1. Please suggest if I could switch from BNP Paribas LT Equity Fund to above 2 new funds or should should I countinue with previous 4 funds and new 2 funds.

    2. Also, kindly suggest If I can increase the SIP of any of these existing funds.

    Thanks You.

      • I am looking for holding these funds upto 12-15 years.
        That also depends on its performance going ahead..

          • Thanks for your reply.

            Goals:

            1. buying a car in next 2 years - 5-6 lakhs
            2. children education marriage in next 15-20 years - 40 lakhs

            for assest allocation, 20:80 as debt:equity

          • Pankaj-1) for this goal, equity is not at all required.
            2) Whether the said asset allocation is maintaining?

          • No, it is not being maintained..I just have above 4 mutual funds available.
            Just wanted to ask
            1. shall I switch from BNP Paribas LT Equity Fund(G) to Mirae Assest Emerging blue chip with 2000 as SIP

            2. May i go ahead and buy one more mutual fund - DSP BR Micro with SIP of 1500

            3. Shall I increase my SIP in SBI Bluechip from 1500 to more for 12 years of investment.

  • Hi Sir,

    I have been investing in Axis long term fund(ELSS) since 2 years. I have observed that the fund is not performing well since 1 year.what could be the reason of AXIS ELSS not performing well in last one year as compared to other funds in TOP 10 for one year return.Although it is one of top three in 3 years returns category.?Any significant management changes?

    • Neha-Whether you compared the benchmark it is following? Don't compare peers but check the benchmark performance and let me know.

          • Since a year sir. That why I wonder that what happened suddenly with this fund . when other funds are doing good in bull market, this fund is giving only 7-8 % return in last one year. In bull market at least we can expect more than 10 % return. Right sir??

          • Neha-It is marginal negative trend in Axis. Look for more than 1 year returns. I still suggest you to continue this fund. No need to worry. Don't change your return expectation due to market boom or peer fund performance.

  • Sir

    Is it mandatory for a professional advisor ( CA, CFP etc.) to register with SEBI as Registered Investment Advisor? Is it applicable to other normal distributors as well?

    Is it illegal to be a distributor of MF without registering as RIA with SEBI? (Specially, when one charges fees from customers who are interested in direct plans only.)

    Is it worth registering with SEBI as Registered Investment Advisor? What about increase in compliance cost?

    Please clear these points

    Thanks

    • Ritesh-Those who charge FEE must register with SEBI as RIA. Worthiness of registration will come into picture when the RIs effect reported after few years. As of now wait and watch the game.

      • Thanks sir for reply

        I have cleared MF VA examination and would like to sell MF schemes. However, selling mutual fund also involves advising a prospective customer about how mutual funds work who may not be familiar with stock market. Also, the customer may be reluctant to pay fees only for advice but may be comfortable with commission earned by distributor.

        So is it not possible to charge fees from customers who want to invest via direct plans and commission from customers who are not well versed with mutual funds at the same time? It seems SEBI's dictate will only discourage new distributors to enter mutual fund industry.

          • It seems there is no clarity yet

            In the meantime, can I apply for ARN and start selling MF schemes? I am asking this question because I don't want to commit any regulatory mistake at the beginning of my career as MF distributor.

            Can you also guide me whether I need to register with each MF or I can sell MF schemes of multiple MF via platforms (without registering with MF)?

            Thanks

          • Ritesh-You can register and start selling. If you don't want to work under any broker, then you have to associate with individual AMCs. Otherwise, you can tie up with NJ India or FundsIndia and start business also.

  • All MF has two main plan : 1. Regular and 2. Direct
    What are these? and which is best Regular or Groth?

  • Dear Sir,
    I had invested in UTI pension 1k SIP, after three 3 years when the returns are good, last year increased to 3k.I was checking regularly monthly statement in mail and fund was doing ok to my satisfaction. Routinely I was checking my bank statement but there were no deduction of SIP except one increased from 1 to 3k. Shocked and checked with UTI they said SIP rejected due to no mention of type of A/C (SB or otherwise).When I asked for the solution, they said give one more check and new form then it will be corrected. I did that. But to my bad luck same thing happened and after sending many mails and calls they are telling to re do it again. The advisor also insisting to give new form and check as a new purchase again. He is assuring all the lost months will be covered.(???!!)
    In the process I lost 9-10 month investment and then same problem repeating because it is not updated in their system bank a/c type.
    Therefore, my queries are
    1.I didn't enter in to their computer but it is their employee and hence the mistake
    2.If SIP not realized they should intimate rather than sending a false statement.
    3.How many times we keep submitting like this and presently I am abroad and cannot follow up.
    4.Is there any way I can update myself online
    5.If nothing works, I will just redeem and close forever.

    Kindly advice.

    • Jose-You can use online account of UTI AMC by creating login and all stuffs and then register a SIP. Otherwise, switch to FundsIndia, create account with them (it is free), and then register the SIP. It is all because of NACH mandate issue. Many are facing this issue.

  • Dear Sir I have taken a loan of rs 35 lac from ICICI BANK recently at an interest rate of 10.5%. I have rs 5 lac spare for a period of 12 to 15 months. Where should I invest this amount so that it can beat the interest rate of my loan.
    Also apart from this amount I have to invest an amount of rs 2lac for my two niece for Term of 15 to 18 years. Please suggest where should I invest this money to get the best and safe returns. This 2lac is apart from that 5lac.

    • Rakesh-It is impossible (as per me, but there may be few so called EXPERTS who may give guidance and may risk your money) to beat 10.5% return within a span of 12 to 15 months. Sorry....BEST and SAFE always need more sharing from you. May I know the definition of both?

        • Rakesh-That rate of interest I want in terms of numbers. LESSER means? Sorry for asking so many questions and it may irks you. But I have to understand you.

          • No problem Sir. Actually I want a lumpsum amount around Rs 20 lac after 18 to 20 years for my two nieces. One is two year old and other is just 3 months. We will need this money for their higher education that time. I have Rs 2 lac is this amount sufficient for my target or do I need more for it. If so please suggest how much do I need to achieve this. If you need to know anything else please ask.

          • Rakesh-Investing NOW and forgetting for next 18 years is not a wise idea. Hence, are you be able to review on your own?

          • Rakesh-Then if your time horizon is more than 10+ years, go with a single equity-oriented balanced fund like HDFC Balanced Fund.

  • Hi Basu Ji,

    I am currently investing 7K in PPF and SIP for following
    2000 Tata Balanced fund
    1500 Mirae Assest Emerging blue chip
    1500 Franklin Indian Prima plus
    Apart from this for my short term goal , I invested lump sum in ICICI Arbitrage fund as well.
    I am constantly following your blog and came to know that my portfolio is poor for 15 years time horizon.
    it should be 30:70 ratio.
    So for 15 years If I modify my investment in below manner:
    7k PPF
    7K MIRAE ASSET
    7K ICICI bluechip or franklin bluechip
    Remove tata balanced and franklin prima fund.
    Is it fine or do I need to still modify it?

    Br, Rahul
    So I continue my PPF investment and need to remove SIP

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BasuNivesh
Tags: Mutual Fund Investors in India
10 years ago

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