Hi Readers,
Here I sharing some of mutual funds secret which most of avoid while investing in them. And Someone need to understand what best to do. It's just as important to know which avenues are best to avoid. So, in this blog I'll introduce you to eight different mutual fund classes and strategies that I believe hurt investors the most.
1. Regular vs Direct Mutual Funds:
There are two types of mutual funds in India: Regular scheme and direct scheme. Think of a direct plan is like this. For example there is mango tree, so there are 12 mango on this tree and if each mango tree has a certain return, then this tree will give us profit of 12 mango as returns. Now a normal/regular plan involves a broker or banker and the commission payable can be as low as one percent per year, so instead of actually getting 12 mango, you will only get 11. Now, if you think that one percent isn't that important, look at the illustration here.
On the recommendation by mutual fund agent, I started a regular plan of Rs.10,000/- per month. My goal is for 20 years assuming the fund gives me 11 returns and I'm going to accumulate over 8.5 lakh over the next twenty years, but instead of a regular plan I invest in a direct plan where I can save upto 1% commission increases my return to 9.6 lakhs. in other words, the agent that I would end up paying 1.1 lakh as a commissions to for this mutual fund along. It is now a simple act of letting me invest one stick. I'm not saying an agent has no value in my financial journey, but if possible, especially with a sip, always go to the class directly.
2. New Fund Offering (NFO):
When a new fund offering or NFO is a regular fund company, a new plan is launched and for the first time it gets money from the public, NFO is when a mutual fund company launches a new scheme and raises capital for it from the public for the very first time understandably. They provide interview services to traders and distributors who carry out route performance. From the investor point of view, to the creation of awareness and heat from an investor point of view, NFO is the first quote, which means there are no planning records, no performance history records, no cost conditions. And absolutely no investor in this case can evaluate and compare the investment portfolio, especially in categories such as large caps, ELSS and Flexi Caps, they may have more than 100 plans at present. This is absolutely useless. This is because NFO is simply new scheme that appears, but you can consider doing it. For example, I see many NFOs that will soon under preforms most of time.
It is essentially based on index factors or strategy -based means. Follow the definition methods and methods. After careful understanding of the materials introduced you may consider the established categories.
3. Sector Focus funds:
The Sector fund shows that investments in companies in special sectors or areas, such as medical care funds. It will have the main interests of the industry, including medical equipment manufacturers and even healthcare companies or even a medical company diagnostic center. There are some departments in technical infrastructure and other health banks, so investors can be postponed here in these special departments and topics. The subject funds have had larger peaks and deeper valleys, as well as a more diversified capital fund for other reasons, that these plans are charged with a high cost relationship.
In some cases, even if it is directly planned, it can exceed 2 %and most invest in these funds based on their historical returns. This is usually due to the cyclicality of these sector and unfavorable exercises, unless you have a convincing reason to avoid the department or topic.
4. Credit Risk fund:
Credit risk funds have always been the underperforming class of mutual funds, at least for me, and now credit risk funds have to lend at least 65% of their low rated bonds which is below AAA/AA, including from DLF Cyber City Bonds and Securities , and NCD like Tata Motors, TV Credit Services etc. As expected, these loan companies offer higher interest rates to compensate for lower credit scores, but this does not hide the fact that these funds take on higher risks, which can interest investors and compromise principles.
In my opinion, the risk of these funds at credit risk is not sufficiently compensating in terms of return it offers, in fact the returns have just kept trace of other categories such as the ultra short duration and the funds of the money market that bring much less risks and volatility and from that perspective. I would avoid the funds at credit risk and instead I would focus on the debt funds that offer moderate predictable profits with a discreet degree of conservation of capital.
5. Debt funds with a low asset management:
In general, I follow this practice not to invest in principle to avoid debts to avoid investment funds that have a very low asset management and this because when the funds do not have enough money, they are very limited to buy by what they can buy and how much they can. It can seriously buy it limited company. So, its fails to diversification -the requirement so important in debt funds,
For example, here we have the fund of dynamic ITI bonds that currently has an AUM of 22 crores now 22 crores is not a large number, this is probably the reason for which the scheme has only two effects purchased, which are kept much lower than maintained in the same category by other schemes, logically, a low count makes these funds a little risky, because a single standard can take the NAV and the performance of the Program Seriously and now you know why I tend to avoid debt funds with a low activity base and a low number of effects in it.
6. Actively Managed Large Cap funds:
Here I am not saying that the large funds are bad, I would like to support every investor to have at least 50 percent of the equity portfolio in large caps company only, but I also think that the regulation of SEBI in 2018 of what is a reduces the selection of large caps and what goes within a limit shares. Most of the funds actively managed funds are difficult to beat the index funds in reality, the report says that actively managed funds fail to beat index. It have exceeded the average large fund in four of the last in the last five years.
So my opinion, unless something happens drastically the index funds managed in most of the years must be able to defeat mostly manage actively.
7. Fund of fund:
The next mistake which I assume is an unintentional one is making an investment in the Fund of Fund/FOF. So an FOF is largely a basket of Mutual funds and in case you are now no longer cautious you may emerge as with stuff in that basket which you do not need it. For example the ICICI potential asset allocator fund of fund makes use of now have not 3 or 4 funds, but 20 funds schemes of its own. After which there are fund like Quantum focus Equity FOF Fund distributes its belongings throughout 9 exceptional funds schemes. If FoF's is belonging to different AMCs now having 9 schemes or 20 schemes in a fund of fund is a debate in itself.
However apart from the reality that it absolutely screws up my allocation any other cause to keep away from a fund of fund is the more fee that one desires to pay. But let's have a look at what is honestly occurring right here so the quantum Equity FOF Fund has an fee ratio of 0.51 for its direct plan that is definitely over and above the fee ratio of the 9 schemes that represent the FOF in reality. I did a tough calculation in this and through my research the total cost ratio which is the refund of quantum rather than the other AMC costs actually reach about 1.5 percent. This double sum is something many investors are not aware of, but now that you know that combined costs make an important analysis area when they consider a fund of funds
8. Fantastic name funds:
So there is clearly no mutual funds category that has a cool name and no idea of what it means, but what I am referring to here are some regulations that seem to have a wider element of marketing of funds instead of managing funds. For example there are agreements which derive from captivating phrases such as the opportunities, make in India, commercial cycles or ethical fund of India etc. As investors, we have a slight idea of what these funds are working on, but not everything is clear that some Mutual Fund has a special situation fund as an investor.
I suppose that there could be eight possibilities for a special situation at any time and that the Fund manager could focus on this benefit from this, but what was surprised, it was that some fund had a much wider share and those special situations were not limited to its classic form of spin-off acquisitions sales activities etc. What was equally surprising was the number of shares and instead of being invested in 10-15 shares that I originally provided that this special situation fund was invested in 75 shares that I thought were building was a bit too broad to fit within a special situation.It definition my point is it's important to be careful when working with funds strategies or products which are non-standard in construct
Conclusion:
All right so these were some mistakes some errors a bit of learning curve that's happened with me over the years I sincerely hope you would have learned some lessons from my experiences and will not repeat the same if you like this blog please share it with your friends and help me grow this blog.
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