We invest in mutual funds to generate good returns. The returns which should beat inflation and at least offer returns better than the traditional savings products like bank FDs, post office schemes etc. Expectation of generating high returns increases when someone invests in an instrument which does not guarantee returns, as investors demand risk premium out of such investments. Mutual fund investments do honor such expectations if the selection is right. With the right selection I mean the selection suitable for your investment objective and risk profile. Problem arises when your investment horizon does not match with the mutual fund’s tenure, your objective does not match with fund’s investment objective and when your selection is based only on returns ignoring the risks. Thus to get the best out of your mutual funds portfolio you have keep a check on the mistakes you generally make while selecting funds. Mistakes are made-
1. When selection is not based on a defined investment horizon – Your selection of mutual funds should be based on goals you want to achieve. Goals define the investment horizon which helps in selection of right asset class like equity, debt or gold. Every asset class reacts differently to different market environment and you should be aware of that. Equity is termed as highly volatile asset class and thus considered as the riskiest. At the same time it also has potential to generate great returns when invested for longer time frame. Debt and gold are considered to be comparatively safe asset classes, but they have their own returns range and volatility. So your selection of funds should be different for different goals. You need to allocate investments wisely in different asset classes. Mutual funds can give you exposure in almost all the asset classes available. Besides this you should also choose categories of funds carefully to suit different goals. For example, you should not enter into short term debt fund for your long term investment requirement. But one thing is certain, if there are no goals there can’t be good investments. Period.
2. When selection is done ignoring the Investment objective of the fund – Every mutual fund has an investment objective which the fund manager has to follow. You can find the investment objective mentioned in documents like Key Information memorandum (KIM), Scheme Information Document (SID) or any other product specific document.. This Investment objective should match with your personal investment objective. A fund’s investment objective will give you a broad framework on the working of the fund. An equity funds’ investment objective will always say “to generate long term capital appreciation…” and also mention the investment strategy and allocation that will be used to achieve the objective. Whereas a long term debt fund will stress on “to maximize income…”. Having a clear understanding on investment objective is a must for selecting a fund. Many people invest in balanced funds just because they saw good performance there in down market, and then regret their decision in the rising market.
3. When selection is done based only returns and not the risks associated- Everyone wants to maximize the investment returns but with the least possible risk. Thus while selecting any investment instrument, including mutual funds the only focus of investor is on returns and they ignore the risk associated. And when risk shows its face, investor loses confidence in the product itself and decides not to invest in the same asset class again. The problem was not in the product, it was in the selection of the instrument. You must go through my other 2 articles on Moneycontrol.com where I have discussed on “Understanding Mutual funds risks” and “Parameters to select mutual funds”. Risk comes from the volatility expected out of asset class and portfolio. No market instrument is devoid of risk, it is just the degree of volatility that is different. With risk also comes the possibility of generating high returns. So what should one do? It is better to understand yourself first before understanding any mutual fund. Get your risk profiling done by a Financial Planner and consult him for suitable products for your profile. Should your investment allocation be more towards debt or you can go high on equity. In debt , should you go into short term funds or long term funds? In equity should you go with large cap, midcap, small cap or hybrid kind of fund?
Believe me once you follow the above mentioned steps while designing your mutual funds portfolio, you will never regret your decision. You just have to stop looking at other people’s investment because they are different from you in terms of Investment objective, goals and risk profile.
0 comments:
Post a Comment