Things to be taken care of before investing in Mutual Fund

1. Mutual Fund mistakes to avoid
Over the past few years, investors have taken favourably to mutual funds. The
asset under management of the MF industry grew 30% from 16.46 lakh crore in
Dec2016 to 21.37 lakh crore in Dec2017. Investors are putting in more than 6200
Crore a month in equity MF via SIPs. Given the euphoria, investors need to be
cautious. Some points to be taken care of in any bull market and why they could
turn out to be expensive in the long run.
Investing for Dividends
A balanced fund offers investors the safety of debt and wealth creation potential of
equity. But lately they have been pushed as a source of dividend income. Several
funds that were earlier offering annual dividends are now giving them on a
quarterly and even monthly basis. They are being peddled as a tax-efficient source
of regular income. But these dividends are paid out of the distributable surplus
accumulated by funds. There is no guarantee that funds will be able to sustain the
quantum of payout. If the market nosedives, these funds may not have enough
surpluses left and payouts may get erratic. A better option for investors who need
regular income is to optfor the growth plan of balanced funds and initiate a
Systematic Withdrawal Plan (SWP) after a year. SWPs guarantee a steady income
and let investors customise the income as per their needs.
Investing for short term
If you want to start a fresh SIP in an equity fund at this point, be prepared to extend
the investing horizon. Here is why. Between April 1997 and March 2000, a
monthly SIP of 10k in Franklin India Prima Plus would have grown to 10.41L. If
lured by high returns, one started a fresh SIP in the fund in April 2000 and invested
until March 2003, the 3.6L would have only grown to 3.8L – 3.6% annualized
return. But had they stretched the duration, the SIP started in April 2000 would
have clocked an annualized return of 36% over five years.
High exposure to mid-caps
With 23% and 17% annualized return over the pastthree years respectively , mid
and small cap funds have comfortably beaten multi-cap and large-cap funds. This
superior performance could easily tempt investors to bet big on this segment.
Experts advise against hiking exposure to this segment. It has the potential to

2. deliver high returns, but exhibits much higher volatility and is particularly
vulnerable when market turns sour. If you have already invested in mid and small
cap funds, stick with the level of exposure you are comfortable with. If you have
not invested in these funds, you should resist the temptation to do so now.
Pausing SIPs
Investors sold equity fund holdings worth 1.9L Crore in 2017 – 45% higher than
2016. Some investors have booked profits entirely while few have paused SIPs
amid rising valuations. This could prove harmful in the long run. Taking your
money out, anticipating a correction, may rob your portfolio of the compounding
corpus, and could result in a shortfall in your target corpus. Unless a critical
financial goal is approaching, leave your money to work.
Not taking advisers help
Direct plans of a MF allow the investor to purchase a scheme directly from the
fund company at a lower expense ratio than under the regular plan. However,
investors who are not well versed with mutual funds should avoid taking the direct
route independently. If you pick the wrong funds, exit investments too early or
deploy money at the wrong time, no direct plan will help you meet your goals. This
is where a financial advisor can step in and hand hold the investor through the
different market cycles.
Note : All views are personal.