Mutual Funds
Truth about Mutual Funds – II: Avoid these common mistakes to really benefit from mutual funds

This is the second of a two-part series on essential facts about mutual funds. The first part explained 15 reasons why mutual funds are good for you


Investing in mutual funds is simple.  But, you must have discipline and patience. It is all about commonsense. You just have to hold your mutual funds for long periods. Mutual funds are excellent vehicles for accumulating wealth. They have great potential for creating lasting wealth in the long-term. Yet, people make mistakes in buying and selling them. Remember, most of the times, you lose patience first, before you lose money. But, these mistakes are very much avoidable. Let us see what these mistakes are and how to avoid them. And how you can make mutual funds worth your while!

 

Buying High and Selling Low.  People have let themselves down frequently by buying high and selling low. Past data shows almost 80% of the mutual funds investments happen after the market has run up and equities are no longer cheap. It leads to disappointment, because, the market either goes down or remains sideways for long periods. Then people get tired of waiting and sell their mutual funds, even at a loss. You can avoid “buying high and selling low” by taking these three simple steps:

  1. By not concentrating all or bulk of your buying in the upper ranges of a bull market,
  2. By holding your mutual funds for long periods through all the ups and downs, and
  3. By refusing to sell your well-chosen mutual funds when the prices are down.

Don’t Chase Top Performing Funds.  It is normal to crave for funds with the best recent performance. You want the fund with the best performance in your portfolio because at the moment of the decision it makes you look good and moreover you are averse to the risk of looking bad in your own eyes and in the eyes of your dear ones. But you must avoid this most common mistake of investing in a fund that has been going up fast, on the assumption that it will keep going up because, past performance is a poor predictor of future returns. Remember, when it comes to top performing schemes, this year’s hero is usually next year’s zero.

 

Don’t Rush To Sell The Fund That Hurts To Own.  Don’t be anxious to get rid of a mutual fund that is most painful to own. Most funds performance falters because the stocks they own go temporarily out of favour. Remember, it is most likely to be a future bargain. By selling your fund when it is out of favour, you not only lock-in a loss but also lock yourself out of the inevitable recovery, which could be lurking just around the corner. If you are not prepared to stick with a fund through three lean years, then you should not buy it in the first place.
 

Don’t Lose Patience.  As a mutual funds investor, you must demonstrate an unusual degree of patience. Remember, patience is your single most powerful ally.  You should be willing to wait considerably longer than the typical average individual investor to get a reward. It is extremely rewarding to hold your mutual funds for long periods, say about 10 years or more. The longer the holding period, the greater is the probability that you would gain more per year. Accumulation of wealth is guaranteed when you allow returns to compound over long periods.  The importance of patience in investing can never be over emphasized.  Benjamin Franklin famously said, “He that can have patience can have what he will”.  And even the famous stock market speculator, Jesse Livermore had this to say, “Throughout all my years of investing I have found that big money was never made in the buying or the selling. The big money was always made in the waiting.”

 

Read Part I: Truth about Mutual Funds – I: Fifteen reasons why mutual funds are good for you

User

COMMENTS

Nilesh KAMERKAR

4 years ago

There is no dearth of mutual funds schemes whose NAVs have gone up from Rs.10 to upwards of Rs.100. (in a span of about 17 years or less ).

It works out to a fantastic CAGR of 15% - 18% or more. And that too over a long period of say 15 years. ( of which the past 5 years have been the most difficult for equities)

Please find out for yourself about these WEALTH CREATORS.

M R Prabhakar

4 years ago

I recommend MF investors to read the book 'surviving the coming mutual Fund crisis by Donald Christensen; Pub Little,Brown and co. two quotes from the book:
Wealthy people such as EdJhonson of Fidelity and Templeton of Templeton MF did not accumulate bulk of their wealth by playing in speculative markets.Instead they made their wealth by plying on the dreams of peopl ......and collecting feesfrom them.
Mike Milken did not become rich by buying junk bonds and collecting interest, He got rich by selling the junk bonds.
2 You can as well give money to your brother in law for investing rather than to a fund manager who gives to his brother in law as you can at least fallback on your sister

REPLY

Suiketu Shah

In Reply to M R Prabhakar 4 years ago

Absolutely right Mr Prabhakar.MF work on investments for very very long periods like 17 yrs etc which is unworkable.

In 3 yr period in the right share like MRF tyres I could earn more than 20%.Why shd I wait 17 yrs?

arvindkumar baid

In Reply to Suiketu Shah 4 years ago

Sir,
I think direct shares investing is definitely more profitable than mutual funds but that also entails great risk than mutual fund. For example if a person had invested in RIL in March 2008 he would have been in loss but if he would have invested in a good MF he would not lost his capital as on date. Similarly a person investing in symphony would have earned whopping returns during the same period. A don't think direct investing is suitable to all. It requires a good amount of capital to start, good research and constant watch. Do you think a person who wants to enter the market for the long term but does not have big capital should leave it. I think he should rather start initially with MF and gradually after having a sizeable capital he can think of direct investing in shares

Suiketu Shah

In Reply to arvindkumar baid 4 years ago

Arvindkumar

We agree to disagree.Yr examples are not relevant as there are thousands of examples which can be given to prove my point as well.

I would request some people of a certain bank to stop stalking me on moneylife.in for their own good.

Nilesh KAMERKAR

In Reply to Suiketu Shah 4 years ago

Dear Sir,

Congratulations! Super returns.

But, an average investor does not possess such exemplary stock picking skills.

jaykayess

In Reply to M R Prabhakar 4 years ago

Well said, Mr Prabhakar!

jaideep shirali

4 years ago

Mutual fund investors need to firstly get the "mutual funds = shares = risk" idea out of their heads.70% of MF investments are in debt schemes, only 27% in equity and balanced schemes, (where atleast 60% are invested in shares). Secondly,considering stock market ups & downs, one should follow a monthly instalment route (SIP) rather than time the market. Thirdly, MFs allow you to invest across different time periods, starting from 1 day. Lastly, find a good advisor, pay him for advice and see the results. Free advice is rarely good advice.

jaideep shirali

4 years ago

Mutual fund investors need to firstly get the "mutual funds = shares = risk" idea out of their heads.70% of MF investments are in debt schemes, only 27% in equity and balanced schemes, (where atleast 60% are invested in shares). Secondly,considering stock market ups & downs, one should follow a monthly instalment route (SIP) rather than time the market. Thirdly, MFs allow you to invest across different time periods, starting from 1 day. Lastly, find a good advisor, pay him for advice and see the results. Free advice is rarely good advice.

REPLY

Suiketu Shah

In Reply to jaideep shirali 4 years ago

"Good advisor" for MF is moneylife.One doesnot need any other advisors once one has ml.You are under the wrong notion that paid advice is good.Wealth management companies are the biggest frauds and they charge for MF advice.

jaykayess

In Reply to Suiketu Shah 4 years ago

I fully agree with Suiketu Shah. Just because you pay for advice, doesn't mean it's good!!

Suiketu Shah

In Reply to jaykayess 4 years ago

Hello Jakkayess ,great minds think alike:)
The best advice is from moneylife.(and important to filter out all other advise direct,indirect or otherwise so it doesnot confuse you)

Have a great week ahead.

jaykayess

4 years ago

Nothing magical in this article. "Don't buy high and don't sell low" - isn't that kind of obvious? And it applies to equity stocks too.

But if Mr Kamerkar can tell us a way to determine what and when is the high and low price, now that would be truly magical... and both Mr Kamerkar and I would be able to retire rich.

Any tips for that, sirji??????

REPLY

Nilesh KAMERKAR

In Reply to jaykayess 4 years ago

There are more ways than one to figure out when equities are selling at a high - Recommend you to read 'The Intelligent Investor' by Benjamin Graham.

Rest assured, you will never ever have to worry about retiring rich ... and that too without having to do anything magical.












Suiketu Shah

4 years ago

Great article Mr Kamerkar.However it is true in view of mass mis-selling by agents in equities in India,if moneylife would not be there I would be far far from the equities world(and rightly so).

R Balakrishnan

4 years ago

Good points. Maybe it would be a good thing to have a third part about some common pitfalls and myths like "par" NAV, NFOs, sectors, etc.
Cheers.

Truth about Mutual Funds – I: Fifteen reasons why mutual funds are good for you

This is the first of a two-part series on essential facts about mutual funds. The second part will discuss the common mistakes people make and end up losing money and faith in mutual funds

One of the giants of the investment industry, John Bogle, said “Your best hope of wealth creation is by developing a sound investment programme through mutual funds”.

 

Here are fifteen compelling reasons why mutual funds are good for you.

  1. The single most important function of mutual funds is to help you in earning a regular income or to generate capital gains over a period of time.
  2. Mutual funds do not offer an assured return. But, they have proven to be profitable long-term investments for individuals.
  3. Mutual funds have great potential. They generate higher returns than something guaranteed. They have created wealth for generally cautious investors who prefer safer investment options.
  4. Mutual funds have made investing very simple. You can do it with greatest of ease. And they are very economical and cost effective. But, remember, mutual funds are not perfect. They are almost perfect.
  5. Mutual funds are tightly regulated by the Securities and Exchange Board of India (SEBI). There can never be a case of any mutual fund vanishing with your money. You can be rest assured. It is just not possible.
  6. If you do not have time to research individual companies, then mutual funds are the best way to invest. A team of investment professionals does all the research and investing on your behalf. You just have to sit back, relax! And hold your mutual funds for long periods.
  7. Your money is pooled along with others, to take advantage of investments you normally do not have access to.
  8. Mutual funds are required to adhere to well defined risk management parameters and investment patterns. Your money gets invested with discipline and prudence.
  9. They have a nice way of lowering your risks. By spreading your money across various assets and strategies. Thus protecting you against putting too many eggs in the wrong basket. 
  10. Mutual funds promote good habits of savings and investing. They have protected countless investors against costly mistakes in the stock markets.
  11. Mutual funds help you in managing your future better. By helping you to achieve your financial goals. They help you in getting you where you want to be.
  12. You are free to sell your mutual funds anytime. You can sell them in parts or in small portions to suit your requirement. You get your money back in 3–4 day’s time with no questions asked.
  13. The temptation to engage in the ever so exciting, but self-destructive trading is more or less absent in mutual funds. Remember, in the short run hares may have more fun. But, in the long run it is always the tortoises that win the race.
  14. You don’t have to spend time in picking stocks. Neither are you required to monitor the stock ticker tapes or the stock markets very closely.  It frees up your time for you to do all those things you would like to do.
  15. Mutual funds generally provide terrific value to long-term investors. They are excellent vehicles for accumulating wealth for yourself and your family.

In the second part of this two-part series we will take a look at the essential facts about mutual funds.

User

COMMENTS

uttam

4 years ago

Well i would say the above points are good if you r climbing the hill, as soon you reach higher risk will increase.

In short if market is good any stock will boom and as a result mutual fund too and if market crashes mutual fund too crashes Sometimes they even change their names, they sell their fund to some other fund houses.

So its matter of "right time of investment" and currently its right time.

Additionally i would like to point about tax saver mutual fund.They are like most favorite for fund-managers i believe they make their personal income out of it and defend it saying the tax gain is the benefit they have offered.

The author has not written anything magical.

REPLY

Nilesh KAMERKAR

In Reply to uttam 4 years ago

Mutual funds are mostly misunderstood. Thus the objective of this article is to inform readers about mutual funds.

To try and bring out those strong aspects of mutual funds which are normally ignored / overlooked.

Suiketu Shah

In Reply to uttam 4 years ago

Agree 100% Mr Uttam.Also sebi has mad rules for investors in mutual funds so anti-investor and so difficult to understand that people who donot know much about mf rightly prefer bamk fd's which even after tax give 10%/yr.Mutual funds normally give 13-14% per yr long term(if you have the right agent and have entered the right mutual fund when market is down).Is it worth taking risk for 3-4% more esp at a time where 9/10 mutual fund agents are crooks.the answer is a clear no.

R Balakrishnan

4 years ago

Enjoyed reading it. By keeping it so simple, the message gets through nicely.
Well written, Sir.

REPLY

Nilesh KAMERKAR

In Reply to R Balakrishnan 4 years ago

Feeling humbled Sir. Thank you so much for your kind words.

Axis Small Cap Fund—Beware of the risk

Five years is a reasonable time-frame for equity investments, but at the same time returns of small-cap stocks can be volatile. Would this five-year close-ended scheme deliver?


Axis Mutual Fund recently filed an offer document with the Securities and Exchange Board of India (SEBI) to launch a five-year close-ended equity scheme—Axis Small Cap Fund. This close-ended scheme will automatically convert into an open ended equity scheme on completion of five years from its launch. As these schemes invest predominantly in small-cap stocks it is necessary to be aware of the risks associated with such investments. In just two months, for the period ending 31 March 2013, the S&P BSE Small-cap Index crashed by nearly 19%. The index, which consists of over 500 scrips, saw nearly 25 stocks crash by over 50%. Five years is a reasonable time frame for equity investments, but returns of small-cap stocks can be volatile. In a way, being a close-ended scheme would be beneficial for an investor as he/she would not get tempted to withdraw the funds seeing a huge decline or volatility in returns which is common in small-cap schemes. But at the same time, a lot would depend on when and where the scheme would invest to ensure the investors gets decent returns at the end of the period.
 

As per the offer document, the scheme would invest a minimum of 70% in small-cap companies which are defined as those which have a market capitalisation within the highest market-cap stock (or Rs5,000 crore, whichever is higher) and lowest market-cap stock on the BSE Small-cap index. The range of capitalization of BSE Small-Cap Index will be reviewed on an annual basis. Up to 30% of the assets would be invested in other equities, debt and money market instruments. As we have seen in the past, small- and mid-cap schemes use this allocation to their benefit and invest in large-cap stocks to reduce the downside risk. (Read: Small- and Mid-cap schemes: Cushioning the fall)
 

As per our analysis, only a few schemes where able to reduce their downside risk and still come up among the top performers when there is a sharp upmove. But to pick such schemes, a prior track record of performance is required. This being a new scheme from Axis Mutual Fund, it has no track record and could be risky. The fund house itself has been in existence for less than five years. The only two equity schemes from the fund house, which have a track record of above three years, are Axis Equity Fund and Axis Long Term Equity Fund. Both the schemes have done reasonably well compared to the benchmark.
 

The new scheme would be managed by Pankaj Murarka, who has over 11 years of experience in the equity markets. Managing a close-ended scheme would be an easier task as compared to an open-ended scheme as the fund manager would not have to deal with new inflows and outflows from the fund. However, when investing in small-cap stocks one needs to go deeper into the business and management of the company rather than relying only on the financials and valuations of the company.
 

This being a close-ended scheme, the units of the scheme cannot be redeemed by the unit holder directly with the fund until the maturity/ conversion date. Post maturity/ conversion date, scheme can be redeemed a) Physical units – with the fund, b) Demat unit – with the Depositor participants.

 

Other details of the scheme
 

Benchmark
 

BSE Small Cap
 

Minimum Application Amount
 

Rs5,000 and in multiples of Re1 thereafter
 

Expenses
 

Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a): Up to 2.50%
 

Additional expenses under regulation 52(6A)(c): Up to 0.20%
 

Additional expenses for gross new inflows from specified cities: Up to 0.30%.

User

COMMENTS

Ramesh Poapt

4 years ago

NFO is a way to add some AUM. And now only 'new'theme is allowed as per rules. Smallcap is 'zing' or 'thrill'ride. Axis now seems matured a bit, dared to enter the dragon!5 yrs close end,will restrict the investors. but may be a bit safer bet for investors n AMC! They should allow one exit window after 3 yrs.

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