Points to consider before investing in Mutual Funds

Most of us like to try out new things whether its dining at restaurants, buying mobile phones and cars to name a few. Some go to the extent of changing mobile phones every one year and a car every three years. Well this is a matter of personal preference and lifestyle and might give you some kind of emotional happiness which is good in some sense.

But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential.

Securities and Exchange Board of India on its part took a series of steps. First, Sebi objected against the use of the word IPO (initial public offer) and instead had every fund house use NFO, to confuse with stock IPOs, to curb rampant mis-selling of new funds.

Secondly, Sebi had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6 per cent initial issue expense.

3 common mistakes all investor should be aware of:

Too less or too many aren't good enough
I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification.

After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good.

At best based on the size of your portfolio, spread your investments across in 4-9 different funds spread across different mutual funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well.

Rs 10 NAV is not cheaper than Rs100 NAV
What you should be concerned about is the per cent fall or per cent rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation.

Don't fall for fancy terms
Don't fall for fancy and general terms such as 'investing in India's growth potential', 'options and derivatives to diversify your portfolio'. See if there are any existing funds with longer track records with similar investment objectives and strategies.

If there are, opt for the tried and tested ones rather than going from newer exotic ones.

How to decide if the new fund is an appropriate one for you?

Take a look at your Financial Plan if you have one or at your existing portfolio. What kind of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap funds, balanced funds, tax planning funds?

The next to see is how does this new fund really add value to my existing portfolio? How does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is a million-dollar question.

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