How To Take Important Decisions On Your MF Investments?

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There are a few decisions that every mutual fund investor has to take at different stages. For a new investor, it is important to decide which funds to invest in and in what proportion, because a good selection means laying a strong foundation. For an existing investor, the decisions could be weeding out non-performing funds and rebalancing the portfolio from time to time. However, investors take these decisions with varying degree of success. Let us discuss a couple of the issues that require investors to take decisions and analyze how they need to go about making these decisions to enhance the chances of success.

Determining the right way of investing in equity funds
Most investors, before investing in any investment option, including mutual funds, tend to pick one that can give them the best returns, especially when investing in equity funds. Many investors go for ‘flavour of the month’ type of funds. Simply put, they believe that investing in a fund that has been doing well for the past few months or quarters will ensure good returns for them. In a rising market, aggressive funds like mid-cap or small-cap-oriented funds, sector funds and thematic funds give good returns, giving investors a false sense of security that they took the right decision of investing in them. It is only when the market turns volatile or starts falling that a completely different picture emerges. Many investors who invest in equity funds to make a quick buck naturally have a short-term view and hence are not mentally prepared to wait out the volatile phase that could last for periods ranging from a few months to a few years. This often forces them to hurriedly exit from these funds and in the process lose even a part of the original investment.

While it is true that even the most diversified and high quality funds also suffer from the market moods, the impact may be much less. Besides, when one invests in equity funds as a part of a carefully planned investment strategy, one is mentally prepared to face a situation like this. Moreover, a long-term investment plan envisages a disciplined investment approach whereby one not only invests in equity funds on a regular basis but also commits only long-term funds to these schemes. This helps investors in more than one ways. While on the one hand regular contributions into equity funds enable them to turn volatility to their advantage as investments made in a falling market allow them to benefit from ‘averaging’ in a logical manner, on the other hand they do not panic every time the market turns volatile as they are committed to remain invested for the long-term.

No wonder, all those investors who have been investing through a Systematic Investment Plan (SIP) and continued the process irrespective of the market conditions have handled volatility in a much better manner. Over the last 7-8 years, there have been numerous examples of investors who have benefited tremendously through this disciplined approach to investing.[PAGE BREAK]

The urge to book profit every now and then
Investors often get overwhelmed in both the situations, i.e. when the stock market experiences rough weather and when it does well. At times, even seasoned investors feel the temptation of redeeming their holdings to book profits. This urge gets further compounded when they receive an advice or rather mis-advice to exit from a good performing fund. The reasoning given is that, once the fund’s NAV reaches a certain level, it loses its sheen in terms of the future prospects and therefore one must redeem and reinvest in a fund that has a lower NAV. This is completely unfounded and illogical. For example, if one redeems from a diversified fund by following this logic and reinvest in another diversified fund, the chances are that many of the stocks would be the same though the exposure level may vary. Therefore, one may end up exiting from a set of stocks at a certain level and end up investing in the same stocks around the same level in another fund. Hence this strategy of booking profits say every now and then can ruin an investor’s chances of achieving long-term investment goals. Remember, an equity fund with an established long-term performance track record is likely to give you better returns on a consistent basis.