Many investors cannot stop themselves from buying mutual fund NFOs and clutter up their portfolios. This guide may help you think rationally and focus on the right priorities.
9.99 out of 10 mutual fund NFOs are not necessary. Hundreds of existing mutual fund options can be used to build a good MF portfolio. Investors often hold too many funds and don’t need them anymore.
Yet, when they see news about a new mutual fund NFO, they start twitching and want to add it to their portfolios. This betrays a lack of planning and focus on the right priorities.
If you would like to address this, you can do the following:
1. Ask yourself, who needs the new fund? You or your portfolio? Almost always, it would be you. You see a shiny object and covet it.
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2. Does your portfolio have a structure? Are you investing with a specific goal? Do you have a specific asset allocation (equity to fixed income ratio) for your goals? If not, work on this. Investing can wait. Process-first. Products-last.
3. Your equity portfolio can have any market cap mix you desire. 100% large cap or 80% large cap, 20 mid cap or 60% large cap, 20% mid cap, 20% small cap etc. Choose one and stick to it (you can follow your heart or the data – Why are you not recommending mid cap and small cap funds?). If you are in two minds after you start investing, it won’t work. Confidence and conviction are more important to successful investing than returns.
4. If you want a stress-free investment journey without worrying about performance and switching funds, choose index funds. How to select an index fund: a step-by-step guide) Active funds will frustrate you from time to time. It is not worth the extra fee or your time/effort. Avoid thematic or sectoral funds for the same reasons – Why Thematic/Sectoral Mutual Funds Are Not Worth Your Investment.
5. Once you have built your portfolio. Focus on building wealth, increasing your income, reviewing your portfolio once a year, rebalancing it, and reducing its risk progressively as the goal deadline approaches.
6. The next time an NFO comes, ask if there is any place for this fund in my portfolio. Almost always, the answer will be, “No, the NFO is not going to help the portfolio in any way“. Move on.
It will always seem like an NFO provides something different or something special and likely to beat your existing funds. However, after a little while, the magic will wear off. Either we have the maturity to appreciate this using past data or live and learn through the clutter. The choice is yours.