Mutual Fund Investing: Do’s, Don’ts and Myths

Published: January 25, 2016 at 3:47 pm

Last Updated on September 4, 2018 at 10:09 am

A non-exhaustive list of mutual fund investing do’s, don’ts and myths. Updated Jan 25th 2016.

  1. 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.
  2. Never buy  mutual fund units in Demat form. There is absolutely no benefit. Plain unnecessary.
  3. 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.
  4. 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
  5. 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!)
  6. 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.
  7. 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.
  8. 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.
  9. 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
  10. The simplest way to diversify a mutual fund portfolio is by not trying! Keep it simple. Stick to minimalist portfolio ideas
  11. A diversified portfolio is not meant to maximize returns but is meant to minimize risks. It may underperform over the short-term.
  12. 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
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Can you justify the presence of each mutual fund in your portfolio? If you can’t, something is wrong with the way in which you are buying funds.
  18. There is absolutely no excuse to not switch to direct mutual funds!
  19. 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?
  20. 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.
  21. 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 the 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?

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)