It may be simple to pick a good equity mutual fund today. Online Forums, advise from colleagues and friends and a peek at their portfolio; information on popular mutual fund websites are all cues which investors pick up to decide on their choice of equity mutual fund. Here’s the big question. What are investors doing to track it? How are they answering the questions on “Have I picked the right one?” or “Should I change my portfolio?”
Honestly, there is no single answer or Clark’s table to answer this best. Investors get themselves into this mess often because they do not seek the advice of an expert who understands the many facets of an investor profile. Partly blaming the introduction of direct plans which happened a few years ago, investors now turn to the advice of online pundits and star ratings on webpages which claim to guide the investor on the best equity mutual fund.
For the all enthusiastic investor it looks like cake- walk in the beginning. It is delusional to think that the investor has all information required to make the right choice of equity mutual fund. The trouble starts when the funds stop performing as expected. What could possibly be the best way out of this self –created mishap? Seek the advice of a mutual fund advisor or a certified financial advisor? If the answer is yes the road is easy. However, persistent investors would vote a ‘NO’ .
Take cues from a few mistakes investors make while trying to choose the right mutual fund.
Get your Basics right : As an investor, it is important to worry about the source of information. A news article or a friend’s portfolio cannot become the guiding light to choosing the right equity mutual fund. Some expert financial advisors have come across investors who have picked schemes without knowing if it was equity or debt. Read, study and understand things from the very basics.
Returns is the Focus : Most first time investors are small investors with no idea of their risk profile. These are investors with an extremely conservative risk profile. Without the right advice they have picked on small cap stocks which they sell immediately when they see a downside. Selling has financial implications. Exit load and Capital gains tax on equity funds that are less than a year old eats into profits or any marginal growth. In most cases the investor leaves with a loss.
Top Performers Vs Risk Profile: Trying to include every 4 rated or 5 rated fund into your portfolio may not be the best thing to do. Ratings are irrelevant to the risk profile. The best thing an investor can do is to choose one or two schemes in the respective category and leave out the rest. Not all great schemes match an investor’s risk profile.
Looking for the Jackpot: It is nice to see new investors jumping onto the Mutual Fund bandwagon. But what are they expecting? A Jackpot with one investment decision? A goldmine that will solve all their financial woes and help them achieve their every goal? All these aspirations are fueled with the idea or trying to make big money in small time. This leads to taking risky bets with the investor thinking about astounding returns in just two years. After two years the disappointment leaves the investor confused about the next course of action.
Too many and too diversified is too difficult: In the idea of reducing risk an investor can over do diversification which makes it difficult to track. The modest corpus that is invested over many sectors will pull down the overall returns of the portfolio with its average. Revamping the portfolio would also become difficult as understanding the leaders and laggards in the portfolio is problematic.
Above all, an investor needs to focus on goals, the horizon of investment and risk profile before making a choice. Then choose the equity mutual fund which is aligned to these parameters.