We usually come across good and bad advice in the mutual fund from different people. Many a times we hear to start early in investment and be for long time in you investment if you want to build wealth. But these advice seems to be very simple to many people therefore we face lot of difficulty in following these advice. But human has a strong tendency to believe the bad advice.
We usually tryout all the bad advice and burn our hands with them; then we realize what wrong things we have done. Therefore many people divorce the equity market and according to them its market fault that they lose the money. They will never realize that what kind of mistakes they made and what corrective measures they could have taken.
Briefing on some of the worst mutual fund advice which you can hear and I would recommend you to never act on them:
1.) Buy New Fund Offer (NFO) units for fast and better gain: Many people will give you this advice, probably they also have heard this from others or they are getting good commission from the fund. Few people believe that the Net Asset Value (NAV) is low so they can maximize their returns by buying low but they usually forget that its not like an Initial Public offer (IPO) or share where NAV will decide the price. In case of equity shares, you can believe by buying low you can reduce the risk of losing money and can maximize the returns but this does not apply to the mutual funds.
Usually NFO comes at NAV Rs. 10, so when people invest in them the fund gets the money to buy the shares. Therefore initially in NFO they hold zero shares; after collecting the money from the market they allocate the money to buy the shares as per the scheme objective.
2.) Buy low NAV fund: Above logic is applied in this section also. NAV is an indication of how the shares held by the fund are performing. In share you can see and buy the share at 52 week low and sell at 52 week high but the same is not applied on the mutual fund. Some people believe that buying at low NAV can maximize their return but its a myth.
Old funds have already collected lot of gains therefore you see their NAV at higher level. This does not make it an expensive fund as the stocks inside (which are sold periodically and new opportunities are constantly explored) may hold high potential.
3.) Sell fund after dividend deceleration: Some people might give you advice that sell your mutual fund after the dividend deceleration. Because they believe by this way they will get more money. Think about it! It is your own money out of which that dividend is declared!
Some people found themselves lucky that dividend is declared after their purchase of mutual fund. So, they take the dividend and sell the fund. Believe me, its the worst mistake you are making.
Mutual funds are different then shares, in equity shares for one time you can use this strategy but in funds you can’t. Because in fund this dividend will be given from the NAV itself. So after dividend, NAV will decrease by same amount. So, don’t fall prey with the dividend and never sell your fund on this basis.
4.) Invest in funds which have lower Expense Ratio: Mutual funds have a different expense ratio; surely their is a limit on upper side of expense ratio. They charge this expense ratio for running the funds, for marketing, for distributing, for salaries.
Many people see the expense ratio as critical factor in selecting the fund. Surely its important but we have to understand that funds have their own expenses. Therefore I believe people should see the returns post those expenses. If this return is high; it means the fund has been delivered.
Normally larger fund have low expense ratio, as their expense get spread on larger amount. The large size of assets is also, often, a reflection of the good performance of a fund.
If you have something to add, Please post your thoughts in comments. I would love to hear from you.