A clear concept is a must to make the correct choices
Recalling my initial days of entering into investments in 2000, I used to face a lot of questions from my clients regarding mutual funds. Over the years, the awareness has increased on both sides— my clients and for me as well. Therefore, the questions have become more logical and so have my answers. However, having said that I realised that there are still some myths regarding investments and I will try to address some common ones this time.
NAV of a fund is important for making a choice
Many people consider a fund with lower Net Asset Value (NAV) to be better. However, the NAV does not have any relevance to the fund performance and returns. A fund having similar returns with a longer vintage will obviously have a higher NAV than the one with lesser vintage. This doesn’t make the lower NAV fund better.
This is not the right time to start an investment
There is no right or wrong time to start investing. The markets will continue to be volatile but we should not try to time the market. Remember, we are making an investment and not playing the stock market or trading. The decision to invest based on timing the markets is akin to starting a journey from home until all traffic lights along the way are green. That will never happen, similarly nor will your plans of starting an investment.
Investments should be started with a big amount
Again wrong!! Nowadays most funds have investing with amount as low as `100. One can start an SIP with an amount which suits one’s pocket. Start low and then watch it grow.
Diversification is a good way to invest
Diversification, or, in other words, investments into different asset classes and different fund categories makes sense. However, over-diversification is not prudent as managing them becomes a nightmare. Have one or two funds in the category of your choice which can easily be reviewed and evaluated from time to time.
Investing by following the herd
Do not have a herd mentality. Financial investments require careful study of the markets, personal requirements, duration of investments and risk-return appetite. These are the few things one has to decide and research for oneself. Other investor circumstances are different from yours, hence, his choice of funds may not apply to you. Do your research yourself or hire an investment advisor. Beware of selecting a fund, based on peer or public recommendation.
Advising does not come for free
There are no free lunches in any profession. Even advisory does not come for free. Be aware about the charges which the fund or advisor is charging, do not shy away from asking your advisor the mode and the amount of income he is earning by advising you. Like any other professional, he is also earning by advising on your portfolio, hence, please have complete understanding by asking questions about the advisory charges and be prepared to pay that to him. It is your hard-earned money that he is managing, therefore, ask him to be transparent about the charges.
There are many models of charges prevalent in the industry so decide with your advisor about the model that you will be using. An advisory without any charges will not be beneficial to either of you and somewhere down the line your advisor will lose interest in managing your portfolio and you will be the loser.
Markets are too unpredictable
Yes, markets are unpredictable and sometimes volatile. However, if your investments are wisely planned, prudently you will gain over the long-run. The HDFC top 100 fund SIP has delivered a return of 18.03 per cent over the last 10 years and investment in the same fund for the last five years have yielded a return of 15.26 per cent. There will be ups and downs in the market, but it only goes to prove that despite the volatilities the returns for a long-term investor is good. The equity markets have rarely been negative in the last five years and never in the last 10 years.
The author is a wealth advisor and Founder, Tangerine Ideas