Mutual Funds are a form of investment wherein investors with similar financial objectives invest their money in mutual funds schemes which invests in equities, bonds, securities and/or money market instruments depending upon the scheme type and objective. It is a pool of money from various investors which is professionally managed by fund managers, invested in diverse instruments and is available at a price which is known as NAV. Mutual Funds are a good investment option for the common man as they are easily accessible and offer lot of options suiting various investment needs and objectives.
Read how do mutual funds work
There are two ways of investing in Mutual Funds- through lumpsum investments or through systematic investments popularly known as SIP. The investor can choose the way depending on his/her financial objectives and / or cash flow availability etc.
Read what are SIPs and the benefits of it. Also read thinking of lump sum investments? What about STPs
In spite of professional advice and careful planning, sometimes investors may fall in situations wherein the money they have invested in Mutual Funds does not grow as expected. Following could be some of the reasons for the same -
Wrong assessment of performance
It goes without saying that an investor must select mutual funds for investment of money based on its long term track record and a few other parameters. But, the question which arises here is, how should this assessment be done for satisfactory results? Well, there is no accurate answer for this but one must always judge the performance of a fund based on how it has performed in the past 3-5 years, what is the track record of the fund manager & the asset management company (AMC), what are the expense ratio and the risk profile of the fund (whether it matches with the investors risk profile or not). One must not finish the assessment on scrutiny of fund performance in the recent past as that is not enough to take a prudent decision for investment.
Sometimes, investors get swayed by the recent performance of funds without knowing the reason behind it. Therefore, the investment does not grow as expected. The reason for spurt in a fund performance could be many, but some simple examples could be – the stocks of a particular sector in which the fund manager has invested has suddenly appreciated, a particular sector is in news or maybe some contrarian calls taken by the fund manager earlier are now paying rewards and so on.
Remember, if one is investing in equity mutual funds one should have a long term horizon and therefore, funds with sustained long term track record could be good choices and not the ones which is in recent news.
Did you know How to select best performing mutual funds: Importance of past performance
Redemption before planned time period
A common problem among investors is that they tend to redeem or switch out their investment in mutual funds the moment they see that it is not performing well at a particular time. This is a wrong move as investors need to note that all schemes, particularly equity mutual fund performances are market linked and therefore, all the schemes will not perform well at all the times. Investors must have patient if they are investing in equity mutual funds.Investors who are not patient loose more money due to panic than the actual non-performance of the funds.Redemption of funds are necessary only after the due diligence that the scheme is not performing upto the expected lines or the investor have met the investment goals or the investor suddenly need emergency funds. The other reason could be the change in your risk profile.
What should be your return expectations from mutual fund
Periodic review of investments not happening
It is imperative that the investor reviews his/her investments in mutual funds periodically (suggested annually)in order to make sure that it is performing as expected and if any changes are to be made in the portfolio, that should be done immediately in order to make sure that no compromises are made as far as reaching financial goals or meeting investment objectives are concerned.
For example, some investors may remain invested for a long period of time but with age their risk appetite changes. Hence, their mutual fund investment portfolio will also change and this should be done during periodic reviews. If the risk bearing capacity of an investor reduces after a few years, then he/she should shift a part of the invested portfolio from equity mutual funds to other less risky options such as debt or hybrid to ensure achievement of goals.
Did you know how to follow a simple asset allocation strategy for different risk profiles
A little bit of patience and reviewing the mutual fund performances annually to ensure that the fund performances are aligned with your goals is recipe for successful investing.
Did you know how to get more returns from your mutual fund investments?
Wrong choice of schemes based on goals
This is a common mistake made by investors, especially the new investors. They sometimes, choose the wrong type of funds, based on their long term financial goals and when it doesn’t perform accordingly, they lose money on their investments or the invested money doesn’t grow as expected. For example, if your long term goal is to buy a house or retirement planning, then you need to invest in equity mutual funds for a long period of time to get the desired results. But, based on these goals, if you invest in medium or shorter duration debt funds, then the returns on the investment according to expectations will obviously be low and you will end up not meeting the goal. Hence, mutual fund advisors must be consulted by investors in order to make these decisions in an informed way.
How to select the best mutual funds – lessons from football
Not enough diversification of portfolio
An investor needs to understand that diversification in investments is one of the prime keys to having a balanced and efficient portfolio. The risk in investing gets diversified when the money is invested in different asset classes and types of funds, rather than kept in one type of fund for the entire time period. A bad performance of one fund at a particular time can balance out the portfolio by an exceptional performance of another fund during the same time period. The other example of diversification could be that investors should spread their investments in debt, equity and hybrid funds in order to benefit from respective asset classes and type of funds. Equities are volatile and the returns are linked to equity markets whereas debt mutual funds are more stable and provide you sustainable returns. Hybrid funds invest in debt and equity and thus provide you the best of both worlds.
Read – The holy grail of investing: Diversification. Also read why diversified equity mutual funds are good long term investment options
Have you selected a fund managed by a good fund manager? A Fund Manager can make or break the performance of a mutual fund according to his/her expertise. An investor, before choosing a fund for investment, must review the past performance of a fund manager as well in order to ensure that his investment is going in good hands. Fund managers performance track record is available in the public domain and investors must do their homework on this or take their mutual fund advisor’s view on the matter before entrusting funds.
Mutual Funds are an excellent investment option for all kind of investors who look for efficient investing options. There will be circumstances and times when the money invested may not grow as expected but these can be avoided provided you understand the reasons behind it and eliminate them before and during your mutual fund investment journey. You must have a clear cut strategy to become a successful mutual fund investor
Wishing you the best!
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.