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:
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.”
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.
In the second part of this two-part series we will take a look at the essential facts about mutual funds.
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
BSE Small Cap
Minimum Application Amount
Rs5,000 and in multiples of Re1 thereafter
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%.