Mutual funds are managed by fund managers and hence investors do not have much say in where the fund managers choose to invest. What investors can do is to choose the mutual funds that match their investment philosophy. There are equity funds which invest in large blue chip companies. There are equity funds that take little more risk by investing in mid cap and small cap companies expecting better returns. Then there are debt funds which do not pose much risk to customers and give moderate returns. There are hybrid funds which invest a part in debt and a part in equity. These funds expose investors to higher risk than debt funds but lower risk than equity funds. Despite availability of information and despite being passive investors, most of the investors still manage to make mistakes which prove harmful for their investment and results in dissatisfaction, unnecessary arguments with their advisors, and loss of investment.

In this article, we will discuss few common mistakes made by mutual fund investors and how can they avoid making it and losing on sleep and money.



NFOs are just like IPOs

This comes as the most frequently made mistake by investors. NFOs are new fund offers. Investors tend to think NFO as IPO which enjoys the notion of giving humongous returns in a short time. IPOs in general have lost money but that is another topic to be discussed some other time.

NFOs are not IPOs. In case of IPO, a new company gets listed with new business, new management, new market, and possibly new potential. In case of NFO, there is no such thing. The fund is new but it invests in the companies that are already listed in the market. They invest at the current price of shares of the listed companies in the market.

 

NFOs are cheaper

This is another misconception. NFOs are priced at Rs 10 a unit while the existing funds have their NAV value which is usually higher than Rs 10. However, they cannot be called expensive simply because they will have more units of underlying stocks than a fund with NAV value of Rs 10.

For example, suppose a fund F1 has two underlying stocks in its portfolio; stock A and stock B. The price of stock A is Rs 10 while the price stock B is Rs 5. If the fund has 1 stock of A and 1 stock of B in its portfolio, the unit price or NAV of the fund F1 will be Rs 15 per unit. I am ignoring here cost of management, fee, and other charges to make the point clear.

Suppose a new fund F2 comes to market which has the same two stocks, A and B in its portfolio. Typically new funds offer at Rs 10 per unit. Hence the new fund F2 will design its portfolio in such a way that the price of underlying portfolio in a unit is about Rs 10. The new fund F2 will have to keep ½ unit of A and 1 unit of B in its portfolio. ½ unit of A will cost Rs 5 while 1 unit of B will cost Rs 5 making it Rs 10 per unit of fund F2.

Now, does it make any sense calling fund F2 cheaper? Fund F1 is Rs 15 per unit but it also has more underlying assets. On the other hand, fund F2 looks cheaper but it has less underlying assets.

 

Comparing funds’ returns with that of market

Many investors compare funds’ returns with the market but it is not the right way to see the returns. Mutual funds are of many types (this is beyond the scope of this article). If a fund is invested in pure equity in blue chip large cap companies, the returns can be compared with that of market. Even when the nature of fund is equity oriented, irrespective of the market cap of underlying companies, we can still compare with the market returns. However, in case of funds investing in mid-cap and small-cap companies, investors should understand that while these funds have potential to give higher returns, they are expose investors to higher risk than the funds investing large blue chip companies.

 

Investing in too many funds of the same nature

This is widespread, almost like a pandemic. Many investors buy too many mutual funds even when some of them invest in same set of companies. There is absolutely no point in buying fund F1 and fund F2 if both the funds have company A and company B as underlying stocks. Hence instead of investing 1 lakh each in fund F1 and fund F2, find out which fund has lower management fee and invest 2 lakhs in that fund.

 

Giving more importance to dividend paying funds

Dividends do not matter in mutual funds. A dividend paying fund will have lower NAV because a part of NAV appreciation is paid as dividend. The growth variant of the same fund will have higher NAV because all appreciation accumulates to NAV. Ideally there should not be any difference in dividend and growth fund except that your fund pays dividend distribution tax (DDT) and then pays you dividend.

 

Making lump sum investment and not sticking to SIP

People hate discipline in their lives. Similarly, investors hate the discipline of SIP. They want the option to spend all money in entertainment in some months and still be able to build wealth in long term. The only reason many investors avoid SIP is the prospect of shelling out a part of salary as investment. Not that, investors are not capable of doing it, but they do not like the idea of making it compulsory.

However, SIP is the most important tool for passive investors. It is disciplined approach of investing which builds wealth overtime. Moreover, SIP nullifies the adverse impact of price fluctuation on your investment. Investing lump sum is a good strategy if you can catch the market at lower level but it is very difficult to do it. Timing the market is a good phrase but a bad strategy.

 

 

Equityfriend – We are there for you

 

We provide sub broking and advisory services through ICICI Securities and if you need personal assistance and advisory in starting your investment journey please drop a mail at This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it.This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it.

 

As we genuinely want you to master the financial/stock market we do not charge any fee for this service.

 

You may also like

disclaimerDisclaimer

Trading and investing involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. No information available on Equityfriend should be construed as investment/trading tip or recommendation or a warranty of profitable results. All risks, losses and costs associated with investing/trading, including total loss of principal, are completely your responsibility.

No one from Equityfriend Team is a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 and the material on this website are provided for information and analysis purpose only. Equityfriend.com is in no way accountable for your use of the website data.