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Mutual Fund Mistakes to Avoid in 2018

Mutual Funds, KYC details, New investors

While each year is different from the previous ones, predictions are always dependent on various macro variable assumptions that may pan out over the course of the year.

Mutual Fund money managers need to stay optimistic and at the same time look at potential opportunities while building the Mutual Fund portfolio. In this process, the Portfolio Manager tries to measure the risk associated with the a) Global Economy b) Indian Macro Economy c) Behaviour of prices in Commodity, currency, interest rate among other things and finally, d) Earnings of companies that drives the stock prices. Upon predicting these variables, portfolio strategy is rolled out as a part of the widely held belief. There will always be some gap between the prediction and the reality, however, one can monitor the variations closely and accordingly take course correction during the year, if need be in the Portfolio strategy.

In this kind of scenario, investors should look at their portfolio construction .i.e. investing in mutual fund with a very high level discipline. They should not make the mistake of looking at the past return and assume that the future return will also be the same. They should not generalize that every year will be as good or as bad as the previous year. On the basis of these principles, one should avoid considering repeat of success and mitigate the risk through proper asset allocation.

The general mistake investors make when returns turn low, below their expectation or negative, is to remove their investments. This is the biggest mistake investors should avoid given the fact that the investments are generally for long term and connected to specific financial goals.

Investors one should avoid expecting a fixed return in fixed income schemes.  A lot of people are moving from fixed deposit of a bank to mutual fund fixed income schemes thinking that mutual fund schemes will give better returns than fixed deposit.  At times, it is yes and at times it is no. Mutual fund fixed income schemes are also subject to market fluctuation arising on account of interest rate movement. Interest rate movements are generally initiated by the Reserve Bank of India through policy action or by the dynamics of the market itself.

Another mistake by investors can potentially happen in schemes where investments are made for monthly dividend purpose. There are many investors who participate in such funds that give regular monthly dividend.   Investors need to understand that monthly dividends are generally paid out only upon making money through accumulated reserves. Assuming that there is no return for some period in the schemes, accumulated reserves will deplete therefore funds may not give the monthly dividend.  Hence, investors must be wary of all schemes bought with high expectation of monthly dividends.

Furthermore, the equity markets can also at times becomes complacent on our economic growth. This invariably happens around high valuation versus the earnings gap. If the earnings upgrade gets postponed due to delay in revival of economy, the market may get into sideways or downward correction.  During such periods, investors have to exercise patience and overcome the temporary halt in the market movements.

Finally, the greed element is the biggest driver of mistakes on most occasions. Greed is driven by high expectation in every category of investment outside mutual fund as well.  Many a times expectation goes up so much, it sets unreasonable expectation of doubling of one’s money over short term period. Such mistakes or wrong notions should be avoided as no one can give superlative performance continuously. Therefore moderating expectation across all products is the best one can do in order to stay successful in the mutual fund investing.

The Money manager too does the same as his/her decisions are driven based on a lot of moving parts in the Economy around the world. Hence he pays attention to the risk first while building portfolios for long term.  Therefore, in the year 2018 too maintaining discipline around asset allocation would be the key driver and the most prudent investment principle.

A. Balasubramanian, CEO, Aditya Birla Sun Life AMC

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