Few would dispute the utility that mutual funds as investment avenues can add to investors’ portfolios.
Here are three tips to make the right investment decisions
Few would dispute the utility that mutual funds as investment avenues can add to investors’ portfolios. There is a huge amount of information available on how to invest in MFs and make the most of them. Sadly, there is little being done to remove the several misconceptions doing the rounds. In this article, we expose three common MF misconceptions.
SIP is an investment avenue
Systematic investment plan is a buzzword of sorts in the MF industry. Fund houses have done their bit to spread the gospel of SIP among investors. However, they have been led to believe that SIP is an investment avenue.
The fact: SIP is a mode of investment, not an investment avenue. The conventional method of MF investing entails making one-time lump sum investments. SIP investing involves making regular investments in a staggered manner. By spreading the investments over longer time frames, investors stand to gain by lowering the average purchase cost.
‘Since inception’ numbers are comparable
It is a common practice to evaluate equity-oriented funds by comparing their performances over longer time frames like 3 years and 5 years. At times, investors are known to draw conclusions based on ‘since inception’ performances.
The fact: ‘Since inception’ performances are not comparable, simply because not all funds have the same inception date. A fund’s performance since its inception can at best be considered for drawing comparisons vis-à-vis the benchmark index (by considering a corresponding period) to evaluate its relative performance.
Thematic funds make good investments
Most thematic funds have delivered superlative performances over the last 18-24 months. Let’s not forget that just about every fund house worth its salt is launching thematic NFOs and that includes fund houses like HDFC Mutual Fund which were always averse to the idea.
The fact: All the hype surrounding thematic funds doesn’t change the fact that they are high risk-high return investment propositions. Such funds can deliver only so long as the underlying theme does well; once the theme runs out of steam, so does the fund. At best, thematic funds are suited for informed investors who can time their entry into and exit from the fund. Retail investors should stick to diversified equity funds with proven track records over longer time frames.
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