Mutual Fund Investor? Drop these 4 portfolio damaging habits today!

The Mutual Fund industry has received a shot in the arm in the form of AMFI’s impactful Mutual Funds Sahi Hai campaign.  On a year on year basis, the industry AUM witnessed a stellar growth rate of 20.57% despite volatile markets. While mutual fund investing is relatively simple in principle, there are in fact a few all too common mistakes that can wreak havoc on your portfolio and negate your chances of making good returns from them. Here are four of them for you to make note of.

Not Paying Attention to Asset Allocation

However high or low the stock markets are headed, going all out into equity funds isn’t a good idea. Neither is being steadfastly risk averse and allocating all your money to debt funds! Instead, consult with a Financial Advisor and take a risk profiling quiz to determine your ideal asset allocation. Your ideal asset allocation may vary depending upon the state of the stock markets too. For instance, if markets are deeply undervalued, even low risk investors may want to have at least 30% of their assets in Equity Funds. What’s important is to have a well thought out, rational asset allocation plan – and sticking to it resolutely.

Excessive Churning

Mutual Funds are meant to be more passive than active. You do not necessarily need to churn your portfolio every couple of months and replace your existing funds with different funds, or especially NFO’s (New Fund Offers) which may have higher expense ratios and no previous track records of performance. Remember that your Fund Manager is, in fact, managing your portfolio dynamically and using his research workforce and intellect to have you in the best possible stocks at any given point of time. Attempting to ‘manage the manager’ will create very little value addition, if any. It could also create tax inefficiencies and lead to losses in your portfolio, if you’re unlucky!

Lack of Reviews

The converse of churning excessively is the super-passive approach of not rebalancing your portfolio at all – equally detrimental. Remember those market movements will distort your ideal asset allocation, and it’s a wise idea to go back to your portfolio once a year and check whether you’re not skewed in either direction. You could do this on your portfolio anniversary, once a year on a specific date, or depending upon market triggers that your Financial Advisor may have decided (such as a certain PE ratio or Market Cap to GDP ratio, to name two). Remember, funds that have performed well in the past may fall ut of favor too. Being too passive may lead to an accumulation of ‘has been’ funds in your portfolio. It’s important to go back to your portfolio with the support of a qualified Financial Advisor and weed out these underperformers.

Overdiversification

There are no medals for owning tens of mutual funds; only to eventually lose track of them as monitoring them just became too tedious! A single Equity Mutual Fund scheme is likely to be investing into 50-75 different stocks, so there’s really no point in owning several funds. Several studies have proven that diversification benefits start tapering off eventually and start affecting your portfolio negatively beyond a point. It’s better to draw the line at a maximum of 5 to 7 funds in each category (equity and debt) at all points of time.