swapna
11-06-2008, 06:36 AM
Life (including investments) is not about not making mistakes, but to learn
from them. A wise person quickly learns from his mistakes - and those of the
others too. Given below are 7 do's and don'ts which we can follow to avoid
mistakes commonly made by investors in MFs.
Rule 1 : Don't look at NAV
I would be repeating this maybe a 100th time � Rs 10 NAV does NOT mean that
the fund is cheaper than an existing fund with say Rs 200 NAV. Therefore,
never look at NAV when you are making an investment decision.
Rule 2 : Do systematic investment
The market valuations today, despite the recent correction, are still not
cheap. Also, there is risk of a possible slowdown in the economy. Therefore,
averaging one's investment by doing SIP is a safer route to investing in
equity markets.
Lump-sum investment is advisable only at very low market PE levels, when the
risk of markets going down further is low and the probability of
appreciation high.
Of course, this does not apply so much to debt funds, where the returns are
relatively much more stable.
Rule 3 : Don't go for Dividend option
If the investment horizon is more than 1 year (which should ideally be the
case when one invests in equity funds), Growth option is generally
preferable both from the point of view of wealth creation and tax
efficiency. For investment period less than 1 year for the short-term needs
� and usually invested in debt funds � dividend option would generally be
better.
Rule 4 : Don't have too many or too few funds
Don't invest in too many or too few funds. While, there is no specific
number of funds which you may own, a portfolio of 12-18 funds should in most
cases be OK.
Too large a portfolio will mean many similar funds, which could dilute your
overall returns. Too small a portfolio will mean that you are not covering
the entire breadth of the market, besides exposing yourself to high risk of
a concentrated portfolio.
Further, your corpus should be appropriately spread across
large-cap/diversified funds, mid-cap funds and sector funds from different
fund houses. Large-cap/diversified funds are relatively less risky, mid-cap
funds are riskier and sector funds carry highest risk. Therefore, to have a
balanced and stable portfolio, maximum money should go to
large-cap/diversified funds, some amount to mid-caps and only a small
portion should be invested in sector funds.
I have seen many portfolios which are stacked with infrastructure funds (the
latest market fancy). Such concentrated portfolios carry very high risk.
Rule 5 : Don't invest in New Fund Offers
Do not invest in NFOs; unless they have something very different to offer,
which the existing funds don't.
Since there is no portfolio or performance to look it, it is difficult to
assess whether the fund would add value to our portfolio or not. Besides,
most of the NFOs launched today are the risky sector funds.
Rule 6 : Do your own study before investing
Ads are meant to lure people. Therefore, it will not be prudent to invest
just because some advertisements say so.
Further, it would also not be prudent to blindly trust your distributor
(especially those who are not professional advisors too). One, they may not
be fully equipped to understand your needs and advise accordingly. Two, they
may not be selling all the products you may need. Three, they may be guided
more by their commissions than your interest.
Hence, always cross-check the advice you receive with multiple sources,
before you commit your money.
Rule 7 : Don't invest too much in global funds
Be very careful when investing in global funds. Global funds would probably
be the riskiest amongst the equity funds. Like any equity funds, they face
the equity-risk.
Besides this they are also open to currency risk. If the rupee appreciates,
you will get less rupees/dollar. Therefore, it is possible that whatever
returns you make in dollar terms, may get fully eroded if in the meantime
the dollar has depreciated. Given the strength of the Indian economy
vis-�-vis the US/Europe etc., the chances of rupee appreciation are high. In
fact, had RBI not intervened, dollar might have already depreciated to Rs
35-38.
Therefore, invest only a small percentage of your corpus in good diversified
global funds; that too primarily for diversification purposes.
These rules will guide an uninformed investor to invest his money wisely and
profit from the potential that the Indian economy offers today.
from them. A wise person quickly learns from his mistakes - and those of the
others too. Given below are 7 do's and don'ts which we can follow to avoid
mistakes commonly made by investors in MFs.
Rule 1 : Don't look at NAV
I would be repeating this maybe a 100th time � Rs 10 NAV does NOT mean that
the fund is cheaper than an existing fund with say Rs 200 NAV. Therefore,
never look at NAV when you are making an investment decision.
Rule 2 : Do systematic investment
The market valuations today, despite the recent correction, are still not
cheap. Also, there is risk of a possible slowdown in the economy. Therefore,
averaging one's investment by doing SIP is a safer route to investing in
equity markets.
Lump-sum investment is advisable only at very low market PE levels, when the
risk of markets going down further is low and the probability of
appreciation high.
Of course, this does not apply so much to debt funds, where the returns are
relatively much more stable.
Rule 3 : Don't go for Dividend option
If the investment horizon is more than 1 year (which should ideally be the
case when one invests in equity funds), Growth option is generally
preferable both from the point of view of wealth creation and tax
efficiency. For investment period less than 1 year for the short-term needs
� and usually invested in debt funds � dividend option would generally be
better.
Rule 4 : Don't have too many or too few funds
Don't invest in too many or too few funds. While, there is no specific
number of funds which you may own, a portfolio of 12-18 funds should in most
cases be OK.
Too large a portfolio will mean many similar funds, which could dilute your
overall returns. Too small a portfolio will mean that you are not covering
the entire breadth of the market, besides exposing yourself to high risk of
a concentrated portfolio.
Further, your corpus should be appropriately spread across
large-cap/diversified funds, mid-cap funds and sector funds from different
fund houses. Large-cap/diversified funds are relatively less risky, mid-cap
funds are riskier and sector funds carry highest risk. Therefore, to have a
balanced and stable portfolio, maximum money should go to
large-cap/diversified funds, some amount to mid-caps and only a small
portion should be invested in sector funds.
I have seen many portfolios which are stacked with infrastructure funds (the
latest market fancy). Such concentrated portfolios carry very high risk.
Rule 5 : Don't invest in New Fund Offers
Do not invest in NFOs; unless they have something very different to offer,
which the existing funds don't.
Since there is no portfolio or performance to look it, it is difficult to
assess whether the fund would add value to our portfolio or not. Besides,
most of the NFOs launched today are the risky sector funds.
Rule 6 : Do your own study before investing
Ads are meant to lure people. Therefore, it will not be prudent to invest
just because some advertisements say so.
Further, it would also not be prudent to blindly trust your distributor
(especially those who are not professional advisors too). One, they may not
be fully equipped to understand your needs and advise accordingly. Two, they
may not be selling all the products you may need. Three, they may be guided
more by their commissions than your interest.
Hence, always cross-check the advice you receive with multiple sources,
before you commit your money.
Rule 7 : Don't invest too much in global funds
Be very careful when investing in global funds. Global funds would probably
be the riskiest amongst the equity funds. Like any equity funds, they face
the equity-risk.
Besides this they are also open to currency risk. If the rupee appreciates,
you will get less rupees/dollar. Therefore, it is possible that whatever
returns you make in dollar terms, may get fully eroded if in the meantime
the dollar has depreciated. Given the strength of the Indian economy
vis-�-vis the US/Europe etc., the chances of rupee appreciation are high. In
fact, had RBI not intervened, dollar might have already depreciated to Rs
35-38.
Therefore, invest only a small percentage of your corpus in good diversified
global funds; that too primarily for diversification purposes.
These rules will guide an uninformed investor to invest his money wisely and
profit from the potential that the Indian economy offers today.