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.

Bank depositors should be protected against inflation, demands AIBDA

Besides asking to protect bank depositors from inflation, the Association wants the RBI to extend insurance cover on bank deposits to Rs5 lakh from Rs1 lakh. The question, however, is who will pay the additional money?

The All India Bank Depositors Association (AIBDA) on Monday said that the Reserve Bank of India (RBI) must look at protecting the interests of depositors and not be oblivious to their needs in the clamour to reduce interest rates it its forthcoming monetary policy.

 

AIBDA held a press conference in Mumbai to put forward a counter-view to the “overwhelming advocacy of reducing the key policy rates from business and industry and their representative chambers of commerce, trade bodies and corporate professionals”. According to AIBDA, “the voice of the borrowing community of banks even finds favour with the Prime Minister’s Economic Advisory Council, Planning Commission, and more importantly, from the finance minister himself”.

 

At the conference, Sunil Bhandare (president), Nitin Raut (vice-president) and  Ashok Ravat made several demands.

 

AIBDA said that bank depositors need to be protected against inflation. They want the RBI to formulate a scheme that ensures a reasonable ‘positive’ real interest rate to bank depositors. With refrence to this, the AIBDA suggested that small depositors (term deposits with maturity of one year and above) up to Rs5 lakh and senior citizens up to Rs15 lakh must be full protected against inflation. Such deposits must be entitled to ‘real’ interest rate of 3% per annum. In other words such deposits must bear interest rate equivalent to an average annual CPI inflation plus 3%.

 

Secondly, the AIBDA contends that this is the perfect time for expanding the “deposits insurance cover” on bank deposits. It has been more than two decades since the deposit cover was fixed at Rs1 lakh. After discounting for the inflation factor of the last two decades (average inflation of 6.5% per annum), the real value of insured deposit cover at 1993-94 prices is reduced to Rs33,000 only. Without any further delay the AIBDA suggested that the insurance cover be raised to Rs5 lakh.
 

AIBDA believe that DIGC has the necessary financial wherewithal and that the banks also need to share a substantive part of the cost of additional deposit insurance premium.

 

Moneylife Foundation, which is a sister entity of Moneylife, does not necessarily share AIBDA’s views on the two points above. First, it is not clear where the additional interest rate will come from, at a time when banks are working round the clock to extract a variety of charges from customers and are even converting free protection services, such as SMS alerts of transactions into paid services. On the deposit insurance too, Moneylife Foundation believes that most payouts from the DICG are made on account of failed and badly regulated cooperative banks. No payout has been made on account of the large private and public sector banks, which contribute the bulk of the insurance premium, but have never had any payout made on their account. By increasing the sum insured, it will only encourage poor customer choices in favour of under-regulated cooperative banks which are often dominated and controlled by politicians.

 

Further, the higher insurance premium will be collected from all depositors—this means that those who bank prudently with large, well-run banks or public sector banks will also end up being burdened with higher costs.

 

Coming back to the AIBDA press confernece, it has expressed strong views on the proposal on the issue of disincentivising cheque usage contained in the discussion paper of the RBI. The AIBDA appreciates the substance and direction of the proposed change towards “Cheque-less and cash-less” modes of payments however the have strong reservations about its relevance and applicability in the immediate future especially from the point of view of individual/household customers. The amount of groundwork that will have to be put in educating the stakeholders about the banking system would be enormous. It may be recalled that Moneylife Foundation has asked for a rejection of the report in toto and even submitted a strong memorandum to the RBI governor on behalf of its 21,500 members.

 

AIBDA further said that in recent months, there is a growing concern among bank depositors about the rising gross NPAs of banks. AIBDA strongly contends that NPAs not only undermine the confidence of bank depositors, but also patently harm their potential rate of return on deposits. This is because a significant part of rising NPAs eventually translates in rescheduling /restructuring of debt, but worst still in virtual write-offs from the profits of the banks.

 

Banks appear to be virtually under compulsion to offer lower interest rates to depositors as NPAs continuously squeeze the profit margins. For this AIBDA would like to make a strong case for “zero tolerance” of NPAs. Herein, the RBI has to play a significant role in exerting some degree of decipline or indulge in “moral suasion” so that the interest of bank depositors are adequately taken care of. Building up of NPAs cannot be at the cost of depositors interest.

 

AIBDA also contends that the preposition to reduce key policy rates is completely biased and one-sided view of the interest rate policy. Bank depositors have suffered enormously in the last three years thanks to stubbornly high interest rates causing erosion of their real earnings. (% interest rate minus average inflation rate.)

 

There are various non-monetary factors that are holding back India’s economic growth recovery and also adversely affecting investment outlook. Therefore RBI must not succumb to the macro economic trends, AIBDA suggests that while determining the scope and direction of monetary policy, the RBI must give adequate considerations towards ensuring stable, fair and reasonable rate of return on bank deposits.

 

-Additional reporting by Khalid Memon

User

COMMENTS

Laxmi

2 years ago

rate cut? simply hand in our pocket in favor of much rich business men so they donate bjp or cong generously.what is zero inflation, what is price of rice, sugar & all 10 years ago & now. rate was 11%, now even less. public is helpless with price rise in 10 years, but why tolerate rate cut, what is 10% with this sort of price. crores to suffer, few business men to enjoy? pull out govt & vote NOTA & putforth what U want(no rate cut, subsidy as earlier by delivery only, 1 cylinder 400/-)etc before U vote. all through price rise rate hike was delinked, why now link with manufactured zero inflation

anjanroutray

3 years ago

I want to be a member of this organisation as I have lost my money in SBI,Chembur/Churachandpur branch deposit in fictitious accounts opened by Bank.The Gov RBI/Chairman SBI are not responding to my complaint

M G WARRIER

4 years ago

Inflation needs to be brought under control and savers should get reasonable return(net of inflation) on their investments. Insulating bank deposits alone is not practical, as bank interest rates depend on several factors including banks’ own income from deployment of funds and profitability, as banks too are doing a business. But, so long as government is not able to ensure reasonable return on savings invested as bank deposits through policy interventions, the minimum that is expected of government is that savers are not further burdened through tax on interest earned.

Harish

4 years ago

I am with AIBDA, First tame inflation than think of growth. Because inflation hurts the growth more, rather than Interest Rates.

PRABHAT

4 years ago

INTEREST ON DEPOSITS WITH BANKS SHOULD NOT BE TAXED TO COVER FALL IN MONEY VALUE DUE TO INFLATION. FURTHER , THE MONEY WITH BANKING SECTOR IS AVAILABLE TO THE GOVT./PUBLIC FOR USE IN THE FORM OF LOAN ETC.

Saradha Group has nothing to do with chit fund business: Chit Funds Association

Saradha Group has about 160 registered activities including realty and resort but not even one activity was registered as Chit Fund in the state, All India Association of Chit Funds general secretary TS Sivaramakrishnan said

Objecting to the use of word ‘Chit Fund’ in multi-crore Saradha Group financial fraud, industry body CFAI today said none of the entities of the Kolkata-based Group was operating as a registered chit fund.

 

“The failure of some multi-level marketing (MLM) or a Ponzi scheme is explained as failure of a chit fund company. This is totally unfair," All India Association of Chit Funds general secretary TS Sivaramakrishnan said.  

 

Saradha Group has about 160 registered activities including realty and resort but not even one activity was registered as Chit Fund in the state, he said, while addressing a press conference.

 

“Our grievance is failure of some other activity, why is it branded as failure of Chit Fund?,” he added.  

 

The association also demanded that the government come out and clear the air over Chit Funds.

 

There are about 10,000 Chit Funds registered in India with annual subscription of Rs30,000 crore per annum. “We are governed by the Chit Fund Act 1982 and implementations by the respective states. This Act is notified in entire India,” he said.

 

“Principle regulator is the Reserve Bank of India, Act is made by the Central Government and rules are made by respective state governments,” Sivaramakrishnan added.

 

The regulator of chit funds is the Registrar of Chits appointed by respective state governments under Section 61 of Chit Funds Act.

 

Powers of adjudication vest in the Registrar and the state government concerned is the Appellate authority. In case of failure of a chit fund business, the responsibility for winding up such a business also vests with the respective state governments.

 

As per the law, a Chit Fund company is not allowed to accept deposit from the public and can only accept subscription amount from the members.    

 

However, Saradha Group accepted deposits from investors and worked as a Multi-Level Marketing company.

 

Meanwhile, the government has said several of its investigating wings like SEBI, RBI, I-T department and Enforcement Directorate have begun crackdowns on Ponzi schemes and have initiated action against Saradha Group under various laws including the Prevention of Money Laundering Act (PMLA).

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)