Mistakes investors make

GOING BY IMMEDIATE RETURNS. Another common mistake that investors commit is to look at the immediate past history of the fund while making investment decisions. One must remember that different sectors do well at different points of time. The realty sector did well in 2007 but was hit hard when the markets crashed. Hence,the returns of got affected.

If you invest in a fund by looking at its immediate past returns,you could end up buying those funds that are enjoying a hot streak at present. In a lot of cases,those sectors would have already peaked,and will witness a downturn just after you have bought them. Rather,it would be wiser to buy funds that have a good long-term track record. Moreover,according to Mukherjee,“One should not rely only on returns. In the case of equity funds that have completely different risk profiles,you cannot compare the returns.”

The same goes for debt funds. These funds have done reasonably well in the past two years due to the decline in interest rates. If an investor invests in these funds on the basis of their high recent returns,he is certain to get poor results,as it appears that the interest-rate cycle is likely to turn in the near future. If that happens,debt funds will produce negative returns. “One should invest in debt funds keeping in the mind the average maturity and the volatility attached to the fund,” says Veer Sardesai,a Pune-based financial planner.

INVESTING IN A FANCY NAME. In some instances,investors go by the name of the fund. Points out Sardesai,“Do not go by the name of the fund,but read the objective of the fund.”

NOT PAYING HEED TO INVESTMENT HORIZON. Another common mistake is to have a mismatch between your own investment horizon and the type of fund that you invest in. For instance,liquid funds are suitable for investments of less than a year. For a period of one to three years,invest in short-term debt funds. Only when you have an investment horizon of three to five years should you invest in equity funds. Such a mismatch creates a problem if a need for liquidity arises. Suppose that after investing in an equity fund for a year you require the funds. If the market has dipped,you could end up getting less than your principal.

COMPARING ACROSS CATEGORIES. A large percentage of mutual fund investors do not have proper knowledge of the various categories of mutual funds that exists. They commit the mistake of comparing mutual funds of different categories and end up arriving at the wrong conclusion. For instance,they could compare the returns of an equity diversified fund with a sectoral fund and select the latter. However,the hot streak of a particular sector inevitably comes to an end after some time. A diversified equity fund,because of the widespread nature of its bets,tends to produce a more consistent performance.

Investors also invest in new funds because these are heavily advertised. Many investors blindly follow their brokers or give in to the hard-sell of agents. This should be avoided. Take the pains to read up and learn about a fund before investing in it.

What should you do?

All these mistakes are avoidable if the investor puts in a little effort. “Look at the risk profile and the investment horizon of the fund. Go for asset allocation among funds with varied risk profiles and investment horizons. Look at the one-,three-,and five-year returns to get an idea of the consistency of performance. See how the fund has performed vis-à-vis its benchmark,” says Mukherjee. One should also look at ratios such as expense ratio (is the fund more expensive than others in its category?). Looking at its Sharpe ratio will give you an idea of the fund’s risk-adjusted returns. Only then decide which fund to invest in. •

niti.kiran@expressindia.com