10 mutual fund mistakes you should avoid

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From taking unsolicited tips to choosing unsuitable instruments, every investor, at one point or the other, makes money mistakes. Especially when markets are volatile, equity investors tend to make mistakes that further increases their portfolio risk. To give you a little insight on what mistakes you can avoid while investing in mutual funds, Radhika Gupta, MD & CEO, Edelweiss Mutual Funds has jotted 10 points in her tweet thread, that may help you keeping up with your profits.

Too much love: According to Gupta, having a too much love for a fund house makes investors often forget diversifying their funds. “A fund does well. You fall in love with the fund house. You have a large mid and small cap scheme from them. They all tank together! Diversify. And remember being good at one thing doesn’t make you good at the other,” Gupta tweeted.

One for all: Gupta suggests investors not to apply the same metrics to analyze different funds. “Applying the same metrics to judge different asset classes. What matters to equity funds doesn’t matter to debt funds. Arb funds are fully hedged – the individual stocks don’t matter, they do in equities. Understand what matters for each asset class,” she said.

Perils of Passive: Investors should not rely too much on passive funds. As per Gupta, “Assuming all passive funds are good because they are cheap. There are terrible passive funds out there too. They track bad indices. Or they track good ones but have a lot of tracking error. Passive requires its own set of research.

Don’t compare apples with kiwis: Gupta advices investors to avoid comparing different categories of funds. “We have categories in MF but sadly all funds in a category are not comparable. Just because a website compares them doesn’t mean you should look beneath. BAF categories have funds that are static, dynamic bond funds have roll downs. Just an example,” she tweeted.

Discretion on discrete returns: “Everyone publishes 1y/3y/5y returns but they mean little. They matter only if you invested on this day 1/3/5 years ago. And one good month can make the entire 1/3/5 series look good. Rolling returns indicate the average investor experience.”

1 year return: Gupta suggests investors to ignore 1 year return statistics while investing in Mutual Funds. “The single most badly used statistic in MF. And the single most published. It indicates nothing about the future returns of a fund. In debt, in fact, it indicates the opposite. Ignore it,” She wrote.

Global view: Different markets have different rules, she noted. It is not necessary what works for international markets, will work for Indian markets as well. She explained with an example, “ETFs have huge structural benefits in the US but in India index funds are a better structure because we don’t have a great market making infra.”

What do I hold anyway? Investors often forget to look at their own portfolios. Gupta tweeted, “Read fund manager commentary. Read market views. Read twitter blogs. But don’t open your portfolio. The single most important thing to check, is what do you hold. And it’s disclosed monthly. See it.”

Copy thy neighbour: Investors should not try to copy others while making investment decisions. “Personal finance is personal. 100 – age doesn’t work. Two 26 year olds may have diff liabilities, family backgrounds, professions. How can their portfolio be the same,” she further said.

Switching costs: Investors should be aware of switching costs. “Do you know how much you pay in switching costs between taxes and exit loads? Every churn costs us more than we estimate, so think hard about it before you hit redeem or switch,” Gupta said, adding that investors should take limited and good advice. Too much of advice could lead to poor decisions.