Many of us invest in Mutual Funds in India. However, we may hardly learn the stories of those who already invested and their problems, mistakes or issues. Let me share a few of them with you.
With the advent of the internet and online advisory portals in the investment world, many of Mutual Fund investors by default think that they are capable of handling their portfolio on their own and claim themselves as Do It Yourself or DIY investors.
A typical journey of Mutual Fund investor in India starts as soon as he starts to earn. However, in many cases what I found is that their first entry into equity market is not through Mutual Funds but through DIRECT stocks. Because he hears a lot of success stories through their colleagues, relatives and again so-called media.
After burning their hands by experimenting in direct stocks, futures and options, they feel equity mutual funds are the best choice. Because by that time, they start to read about Investment Gurus like Warren Buffet or Charlie Munger. After learning the basics of investment and the tags like BUY RIGHT and SIT TIGHT, they enter into the world of Equity Mutual Funds.
But do you feel by jumping into equity mutual funds their investment mistakes vanish within a day? Sadly NO. The reasons are as below.
You must invest in Mutual Funds in India, but learn the basics of investing at first. Once a young or fresh energetic investor decided to jump into the Mutual Fund world, they start to search their answers in Google BABA. Google will provide you wonderful Crores of results for your one keyword research. Slowly new investors start to look for readymade answers. Because he or she does not have time to learn and digest and then invest.
Their first priority is that they MUST invest in Mutual Funds which are BEST and will remain BEST forever. Because who wants a BAD choice? We are human and we run behind BEST only. But sadly they forget what one must do before Invest in Mutual Funds in India. They jump into my fund choices and invest BLINDLY. Along with mine, they also dig into other finance blogs, portals like Moneycontrol or Valueresearch rating. Finally, they start with the BEST and STAR rated funds.
This will go for a few months or years. Suddenly they notice that a finance expert or a few online portals which he is following has recommended a few more funds due to the changed scenario or based on India Growth stories. This makes the new investor that if I do not invest in such a solid fund which is currently a trend and many are recommending, then I may lag behind others or my returns may be lesser than others. Hence, let us add this or these new funds in my investment.
Slowly the start with 2-3 funds now increased to 7-8 funds. Because they need all the BEST recipe available in the Mutual Fund industry. They feel fear if one best performing fund or 5 star rated fund is not in their portfolio means a HUGE LOSS or a MISTAKE.
Hence, they go on adding new funds based on INFORMATION provided by Google BABA. Finally, their portfolio consists of 10+ funds.
By this time, it does not mean they are running the monthly investment (SIP) in all such 10+ funds. They simply stop the ongoing SIPs and start afresh SIP in a new fund which makes them eye-catching. Hence, even though they may be holding around 10+ funds, their monthly investment is only in 4-5 funds. But due to their doubt on their own decisions and the laziness, they never come out from the existing funds. One more reason why they don’t want to switch is that they want to come out from funds only with PROFIT, not with LOSS.
Finally, their mutual fund portfolio ended with these below mistakes.
# No Goals
While investing in Mutual Funds, they just looking for fancy returns but sadly they never set their financial goals. This should be the first step of any investor. However, around 99% of so-called mutual fund investors will hardly bother about investing based on financial goals.
# No Asset Allocation
When you did not set any financial goals, then no question of thinking about debt to equity asset allocation. Hence, many of these investors portfolios are highly linked to equity funds. They may be holding Liquid, Abirtrage or other types of debt funds but not for the purpose of asset allocation but with the purpose that someone suggested them that they beat the FDs in long run and better than Bank FDs or other alternatives of debt part.
# Fancy Funds
If you look into their portfolio, you notice that they are holding all those FANCY, top RATED or sector funds. One thing is common that they are holding all those fancy funds to create a good recipe of the portfolio.
# Overexposed to the sector or particular market cap
They usually exposed highly towards one or two particular sectors or heavily invested in Mid and Small Cap without bothering the Large Cap. Because they noticed that sector funds, Mid Cap Funds or Small Cap Funds have given around 15% to 25% returns RECENTLY. They forget for a moment that by doing this activity, they are risking their money and they never bothered about overlapping.
# Not ready to reduce the fund numbers
It may be due to laziness or feeling uncomfortable to invest only in 3-4 funds. Because as per them, lessor the funds means higher the risk as this approach will not provide a proper asset allocation.
# For many of them switching to another fund under LOSS means a REAL loss
When your fund is underperforming and it is under loss, then when you switch to another fund, then there may be a certain loss for taxation purpose. However, as an equity investor, it is not a REAL loss but I call it as a notional loss. Because you are not coming out of equity, but simply shifting from one fund to another fund. Hence, whatever the loss in such activity is a notional loss but not the real loss. But sadly many are reluctant to do this. Because they decided that by hook or crook, they have to come out with PROFIT.
Investing in Mutual Funds nowadays is like buying a product in Amazon or Flipkart. But do remember that in Amazon or Flipkart, you are buying a product to consume but not for investment. Hence, never compare the ease of buying products on Amazon or Flipkart with your online mutual fund buying.
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