personal finance

Year-end special: Direct mutual fund investors need to do thorough homework in 2019


Many mutual fund investors are in a contemplative mood at the end the year. Many are using the occasion to review their mutual fund portfolios. We are getting many queries on ETMutualFunds Facebook page from our readers. We have noticed that there is a common thread that runs across most queries: most of the investments are in direct plans of mutual fund schemes. And most investors are worried about the underperformance of the schemes in the past year, and the suitability of schemes in their portfolios.

It is easy to answer and convince the readers about the first question: the stock market is in a bad shape, and that explains the poor performance of most equity mutual fund schemes. Also, as we all know, the stock market typically goes through ups and downs, and we should not get swayed by such short-term trends. It is time to think long term and continue with our investments to achieve our various long-term financial goals.

However, what about the direct investments and suitability of the schemes in the portfolio? Well, it is a bit complicated.

Many new investors have got into mutual funds after the demonetisation. Most of these investors were nudged by the attempt to formalise the economy and good show by mutual funds. Most probably 2018 is their first bad year in the stock market. That probably explains their nervousness. Obviously, they would get used to it and emerge as better investors in some time.

However, they should be concerned about two things. One, their vague risk profile. Two, their mutual fund picking and selling skills.

‘Knowing your risk profile’ is often repeated concept in the mutual fund world. However, many investors make up their risk profile on the spur of the moment. The trouble with that approach is most people are extremely aggressive when the market is going great guns and there is optimism all around. They become extremely conservative when there is a downturn. That is why we believe that it is extremely important to clearly define the risk profile before investing.

The second problem area is the suitability of the scheme. It is very common to come across smallcap schemes and midcap schemes in the portfolio of a conservative investor. Similarly, an aggressive investor is loaded on largecap schemes. This is mainly because of lack of homework.

It is very important to understand that you must choose mutual fund schemes in line with your risk profile. For example, if you are conservative investor, you should choose largecap mutual fund schemes. If you are a moderate investor, you should choose multicap schemes. Aggressive investors should try to invest mostly in midcap and smallcap schemes.

Sure, if you want to diversify your portfolio or reduce risk, you may add schemes from a mutual fund category with lower risk to your portfolio. However, most of the schemes in your portfolio should be in line with your risk profile.

Lastly, even when pointed out these mistakes, most new investors are not able to take a final decision on their investments. Most new investors seem to be haunted by analysis paralysis or decision paralysis. These investors should realise that it is extremely important to take prompt decisions to maximise returns from your investment.

If you are not able to do it, the only way out is to consult an expert. Yes, we know you don’t want to do it. You do not believe that the so-called experts were worth their commissions, and that is why you are investing on your own. However, if you are not able to take timely decision, you should evaluate your position.





READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.