Finance

Five Pieces of Bad Mutual Fund Advice to Ignore

Mutual Funds are a pool of professionally managed funds where the fund manager buys and sells securities in accordance with the scheme’s investment objective. Mutual fund investors are expected to determine their life short term and long term financial course before taking the final call with the mutual fund investments. Depending on the nature of the scheme and investment objective, mutual funds may invest or allocation assets across various money market instruments like equity, company stocks, government bonds, corporate securities, debentures, company fixed deposits, commercial papers, etc. While some mutual fund advice like ‘one should start investing early for  better  capital appreciation’ or that ‘one should start the systematic investment plan in mutual funds to inculcate the discipline of regular savings’ should be taken into consideration if you are looking forward to investing in mutual funds.

However, bad advice can ruin an investment strategy. Especially when it comes to mutual fund investments, one should stay away from bad advice. There are plenty of do’s and don’ts related to mutual fund investments out there, but investors need to reiterate these advice and only focus on those which can actually help them in their investment journey.

Here are 5 mutual fund advisors that one should ignore:

  1. Invest in every NFO that a fund house releases

Although it is true that whenever a mutual fund house releases a new scheme, that scheme is available at a discounted rate for a limited period of time. This phase when the units of mutual fund scheme are available at a discounted rate of Rs. 10 is known as New Fund Offer (NFO). Some mutual fund advisors believe that if you invest in an NFO, after the fund gets publicly listed the NAV of the fund may go up. This may or may not prove to be true in every situation. If the new mutual fund scheme underperforms as soon as it gets publicly listed there is a chance of the value of the NAV dropping furthermore.

  1. Dividends are better than growth option

 Dividends are known to offer regular income. However, the fund manager will only deliver the evidence if the mutual fund scheme manages to make profit. If you are investing in mutual funds for or capital appreciation over the long-term then you need to go with the growth option. In the growth option the profit earned by the schema invested back in the mutual fund.

  1. Make a lump sum investment in mutual funds

When you make a lump sum investment in mutual funds you are allotted more units in quantum with investment amount. This may seem good at the moment but in the long run not benefit from several investment features like compounding in rupee cost averaging. A systematic investment plan on the other and allows investors to make small investments at periodic intervals. Did not need a large principal amount to start investing in mutual funds.

  1. Invest in only those funds whose NAV is low

Just because the NAV of a fund is low that doesn’t mean you should invest your money in it. The NAV might be low because the fund has been consistently underperforming for a very long time. This means that there is no guarantee that the fund’s NAV may improve in future.  Investors are expected to do a background check of the fund and check for its past performance before investing.

  1. Invest only till the lock in period

Some mutual funds like ELSS come with predetermined locks in a period of 36 months. This doesn’t mean that one should withdraw their ELSS units once the lock-in period is over. If the tax saving scheme that you invested in is consistently performing and beating is benchmark then you may remain invested to earn better capital appreciation over the long run.

If you are new to mutual funds and feel that you need further assistance in making an investment decision you should consult your financial advisor.

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