Investment habits to avoid while investing in Mutual Funds

Many persons have made money or have been able to achieve their goals by investing in mutual funds. These have been savvy investors or have got good financial advisors. There are others who also invest in mutual funds because others say they have achieved goals by investing in mutual funds, so they also go about investing in mutual funds. Their way of looking at mutual funds is like investing in the stock market directly without understanding the working. I hear many of them saying invest in the mutual fund when the NAV is low. NAV being low does not mean anything, at that point they argue that they get more units, because they believe that having more at a low price will give them more benefits when the NAV goes up.

In reality it does not matter. Any movement in the NAV depends on the portfolio in which the fund is invested and the number of units. So having more units or less units does not matter. Let me give you an example, if the cost of the portfolio is Rs.10,000/- and there are 100 units the NAV will be Rs.100. So if you buy 10 units at Rs.100 your cost would be Rs.1,000/- Now say there are only 10 units, then the NAV would be Rs.1000/- So you would buy only 1 unit at Rs.1,000/- After a year the Market Value of the portfolio become Rs.11,000/- i.e. an appreciation of 10% in this case in the first scenario the NAV would become Rs.110/- and in the second case it would become Rs.1100/- and your return would be the same i.e. Rs.1100/- so if you see, buying at lower NAV is just a sales pitch. Do not fall for it.

There are others who buy because a scheme is giving dividends, again dividends do not mean anything. You should go for dividend option only if you need the money. Remember that when a dividend is paid out, a portion of the dividend has to pay to the government as Dividend Distribution Tax, so in effect, you get less money in hand. If you let the money remain, the fund manager will be able to generate more income out of this and when you remove the money when you need it, you end up with more money in hand. When Dividend is paid the NAV also comes down. This is one more reason why Dividend reinvestment option is also not good. As what gets reinvested is after some money is paid to government.

You do not need to open a demat account to invest in Mutual funds, this is some mis-selling being done by some banks. There is an ease in investing that is all. There are many more platforms not available where you can still have the ease of investing without having a demat account. As I had mentioned earlier, the NAV depends on the portfolio. Here portfolio does not mean just equities, it means any investment in financial assets viz. Bonds, NCD’s, FD’s etc. So mutual funds are an alternative to investing in stock markets or even banks or Company FD’s, NCD’s etc. When is the right time to invest in mutual funds, actually it should be anytime, all depends on your goal, if it is long term go for equities.

Here you should go for Systematic investment option. By this you average out your investment costs and end up with superior returns than a lump sum investment. How do you choose your mutual fund, go by the long term performance of the fund, and just don’t go by the returns over the last year. Last year almost all funds did well. We have to see how the fund did during both the bull and the bear run. Avoid the above habits and make money by investing in Mutual Funds.