Bad Mutual Fund Advice that is to be Ignored !!!

Many Mutual Fund Schemes across categories have delivered good returns over the past few years. You have to plan, research and analyse the funds before investing. Here is some advice that you may hear and should stay AWAY from while investing in MFs.

1. Invest in a MF scheme that has a Lower NAV than others

Many times, there are advertisements or financial advisors trying to sell MF units with a low price or NAV indicating that they are cheap. New Fund Offers are sold in this manner too. But the NAV is determined by the value of the underlying assets. NAVs are not like stock prices. When the value of assets increases, the NAV will also increase irrespective of the current value of the NAV. Suppose there are two MF schemes Scheme A and Scheme B with identical portfolios and NAV of Scheme A is Rs. 10 and of Scheme B is Rs. 100. At the end of 1 year, suppose the value of the underlying assets has appreciated by 10%, the NAV of Scheme A will be Rs. 11 and NAV of Scheme B will be Rs. 110. You would have gained the same in both.

2. Invest in Dividend Option of MF Schemes to get returns

Dividend payouts in MF schemes are not bonuses or extra money earned. The dividend is paid out from the portfolio itself. So when dividend is paid, the value of NAV becomes lower. So there is no extra money earned in dividend MF schemes as compared to growth. Dividend MF schemes help you in getting income (though it is not guaranteed) and when markets are volatile, getting out some money from your investment is helpful.

3. Invest in XYZ MF as somebody else has made a huge profit on it

It is not very prudent to blindly invest in a Mutual Fund Scheme that someone earned good returns on. It is important to understand the MF objectives and if they align to your financial plan. It is important to check the portfolio, the expense ratio and current market condition. The other person may have invested when the value was low. Now the value is high. It is not necessary that you will earn similar returns.

4. If you have invested in Mutual Funds, your Financial Planning is done

Mutual Fund investment is NOT financial planning. It is a part of financial planning. Yes there are different types of mutual funds which will help you to diversify your investment corpus, but diversification is only one aspect of financial planning. Financial Planning is a bigger exercise that involves budgeting, saving, investing, setting up goals, tax planning and estate planning.

Mutual Funds are an important aspect of one's investment portfolio. Decide on the schemes to invest in depending on your portfolio, financial capability and financial needs. Look at the performance of the MF schemes as well. Select the schemes that have a good track record and invest using the SIP way. Do not over expect from the MF schemes and keep a long-term view.