From the growing number of portfolios that our readers send us for evaluation, we have identified the most common mistakes.
Simply avoiding (or rectifying) them should put you on the right track.
1. Haphazard investing
Have a holistic view to investment rather than a piece-meal approach.
Often, investments are made with no proper planning or goal in mind. Instead, factors like year-end tax planning and availability of surplus money at a given point of time guide investment decisions.
People judge the investment worthiness of an avenue right at the moment of making the investment. Naturally, the conditions prevailing at that time take priority.
For example, if stock markets are in the doldrums at the time of investment, instruments like the National Savings Certificate are chosen. If the market is booming, then diversified equity funds would probably be given preference.
In the end, the portfolio (all investments put together) totally lacks focus.
2. Getting swayed by the hot winners
No one is saying that picking the right fund is an easy task. But investors have a tendency to get carried away with the hot-performing funds of the day.
Don't blindly buy the units of the latest top-performing fund. Instead, consider long-term, consistent returns. Always compare the returns over various time periods: five year returns, three-year returns, one-year returns, three-month returns and one-month returns.
A hot fund may have a great three-month and one-month return but very low three-year returns. In such instances, think carefully.
3. Too many funds
Don't become a funds collector.
More funds do not translate into greater safety. Pick a select number of funds you believe in and invest in them consistently.
Don't get swayed by the new funds hitting the market just because your agent says so.
Having a long list of funds in your portfolio ensures nothing but complexity.
4. Too few funds
While some have the problem of plenty, others lean towards having too little. Permitting just two funds to determine your financial fortunes might not be a good idea.
In The best funds to invest in, we spoke about breaking up investments into core funds and non-core funds.
In our opinion, two to four equity funds and one or two debt funds are quite enough for each type of fund.
Let's say you want to invest in a debt fund (funds that invest in fixed return investments), floating rate debt funds (funds that invest in fixed return investments whose rate of interest varies with the interest rates in the economy), large-cap diversified equity funds (funds that invest in the shares of large-cap companies of various sectors) and mid-cap funds (funds that invest in mid-cap stocks).
The number of funds we suggest in each category is:
Short term debt fund: 1
Floating rate debt fund: 1
Large-cap equity funds: 3
Mid-cap funds: 3
5. Turning a blind eye
If you have a long-term perspective in mind, you are right in investing in equity mutual funds.
But, as you get closer to your deadline, it is time to gradually start selling your units and put them in fixed return investments. Imagine if you had to sell your units in the year 2000, when all the diversified equity funds had slumped.
To avoid unpleasant surprises, as your date approaches, gradually start selling and move to other investment avenues.
6. Losing focus
Investing regularly in a few good funds is all you need to do. But, sometimes, the funds you have selected may not gel well together.
For example, you might have invested in a diversified equity fund and then in a mid-cap fund. But the diversified equity fund that you have invested in may have a large amount of mid-cap stocks.
Now, your total investments will be largely in mid-caps and this may not be what you want at all.
Or, you may invest in a diversified equity fund and a tech fund. But the diversified equity fund may already have a huge amount invested in tech stocks. Now, your investments are tech heavy and, if the sector slumps, you will be badly hit.
Always look carefully at the fund's portfolio.
Avoid these six common mistakes and you are well on your way to becoming a savvy fund investor.
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