A non-exhaustive list of mutual fund investing do's, don'ts and myths. Updated Jan 25th 2016.
- Never buy mutual funds (or anything for that matter) from banks. They don't care about us. All they care about is their commissions. So they will be happy to thrust just about any product (mutual fund, ULIPs, ....) down our throat without ascertaining suitability.
- Never buy mutual fund units in Demat form. There is absolutely no benefit. Plain unnecessary.
- Never get swayed by star ratings. Star ratings are for analysts who wish to rank mutual funds. They are not for investors. As an investor all we need to worry about is our portfolio health.
- Focus on net returns from an asset class. The simplest way to focus on portfolio health is to find out the net returns from all our equity and debt holdings separately. That will help you identify the performers and laggards in the folio. Read more: How to review your mutual fund portfolio
- Never buy an NFO for NAV 10. It is not about number of units. It is not about NAV. It is about rate at which the NAV grows (and falls!)
- Never buy an NFO if you are a new investor. If we wish to buy an NFO, we must understand the nature of the product.
- Read Scheme Information Documents. We must understand the nature of even established products. So reading the scheme information document is the best way to go about it.
- Stay away from antics like VIP and STP. Invest as much as possible each month regardless of the state of the market. Rebalance from time to time and invest lump sums manually as soon as possible. As long as we don't need the money anytime soon, these things don't matter.
- Do not buy ELSS funds if you do not need tax breaks! There is no evidence that ELSS funds perform better because of the lock-in period. Remember distributors will be paid the entire commission for SIP duration upfront. Read more: The Myth About ELSS Fund Lock-in
- The simplest way to diversify a mutual fund portfolio is by not trying! Keep it simple. Stick to minimalist portfolio ideas
- A diversified portfolio is not meant to maximize returns but is meant to minimize risks. It may underperform over the short-term.
- There is no definite evidence that index PE based tactical exits and entries will outperform a dull a boring SIP! If we wish to time our entry and exit as per market valuation, let us understand that it is more for our emotional well-being. It may or may not result in higher returns. We can back-test all we want but making real-time calls is tough. If we get it right, it is down to pure luck. Read more: Misconceptions about the Nifty PE
- There is no definite evidence that trend following techniques like 200 DMA will give better returns than a dull a boring SIP! Yes, timing the market has good potential for outperformance in terms of better risk-adjusted returns. That does not imply higher returns!! More on this later this week based on Mebane Faber's work: A Quantitative Approach to Tactical Asset Allocation
Before timing the market remember that timing techniques are based on past history of other (US) markets and not ours which is quite young. We are timing in real-time and that is not the same as back-testing.
- We cannot hope to remain invested in the 'best' mutual funds at all times! Some funds will do better than ours, and some worse. All that matters is, are we investing enough for our goals and are we on track in terms of growth.
- A unified portal for investing in mutual funds is overrated. Be it a distributor run portal or an AMC run portal (MF Utility), we do not need access to all AMCs at all times. We can't be changing funds and AMCs every year. Any mutual fund should be given enough time to perform (say at least 3-5 years). Mindless buying and churning will only harm the folio.
- Track portfolio volatility. Keep a record of how much your mutual fund portfolio loses or gains each business day. This will help you get used to volatility and to have perspective of market movements. This will also help you define a 'lump sum'. For example, if you stand to lose or gain Rs. 50,000 a day, a sum of Rs. 10,000 is not a lump sum in your mind. One lakh is, but you can divide and invest in over the space of a few days since you are used to gaining or losing a sum close to each bit of your investment.
- Can you justify the presence of each mutual fund in your portfolio? If you can't, something is wrong about the way in which you are buying funds.
- There is absolutely no excuse to not switch to direct mutual funds!
- Do not compare expense ratios when the portfolios are different! Compare expense ratios only for direct and regular mutual fund plans. What matters is performance. Since the NAV is net of expenses anyway, as long as your returns are good, why bother?
- John Bogles and Warren Buffets ideas about index investing do not apply to Indian markets. Perhaps they will down the line. I don't care. I am happy with my significant alpha. I rebalance from time to time and lock this alpha in debt. Perhaps active funds may not beat the index after several years, my portfolio would. That is all that I care about.
- Investing is not rocket science. In rocket science, there is only one optimal path for a spacecraft to move from one point in space to another. In investing, there are multiple solutions to a problem and we no idea of knowing beforehand which is the 'best'. We need conviction to choose a comfortable path and stick to it. As long as we are moving in the right direction, nothing more need be done.
Would you like to add more to this list?