Are you Tolerating your Poor Mutual Funds Performance?

There are several reasons mutual fund investors tolerate a lot of flak for bad performance from their selected best mutual fund scheme. This can be an expensive mistake, especially if you are relatively young and have many years to put your money into fund through SIP. Perhaps the biggest complaint levied against mutual funds is that not performing as they should. But the criticism often dismisses some of the positive aspects of the asset allocation and its rebalancing mechanism that most financial planners and advisors still use to take control of your mutual fund performance and beat the market index.

By looking at some of the most common basic causes, you might stand at a better chance against experiencing subpar results in your own portfolio.

Not Knowing What a Mutual Fund Is?

The first and for the most common reason investors tolerate poor mutual fund performance is that most of the new investors don’t actually know what a mutual fund is, what a mutual fund does, the types of assets a mutual fund owns, or how a mutual fund works. If I ask them to write a short answer to the question, “What is a mutual fund?” most would struggle to come up with anything other than “an investment”. Many investors don’t have a clue how to shop around and instead think that a mutual fund is a mutual fund is a mutual fund, when nothing could be farther from the truth.

Not Knowing What a Funds Owns

The second reason that many new investors seem willing to tolerate poor mutual fund performance is that they don’t even know if the fund they bought, invests in equity, invests in debt securities, or invests in real estate or invests in gold etc! Without knowing the types of asset classes into which you have invested your hard-earned money, you can’t know if you could be earning 2%, 5%, or 10% over the long-run. As a general rule, over lengthy periods of time, equity does better than debt, real estate and gold etc.  If you own a highly rated equity mutual and expect to earn 12% a year on your money in the span of one year, you are going to be disappointed in today’s interest rate environment.

Sin Chasing Past Mutual Fund Performance

Chasing past mutual fund performance is huge and common tolerance that consistently new investors do face. They believe that investing in a fund that has done well in the past will guarantee success in the future. It isn’t that simple. Countless studies have shown virtually no correlation between high performing funds in one period with high performing funds in future periods. Does make common sense that investing in mutual funds with the best past performance is a good way to manage money? Reality is more complicated.

Often investors have no idea that the portfolio manager running the mutual fund today isn’t the same person or team that was running it during the period of good performance.

Large AUM size sap your returns

When investors invest high rated good mutual fund based on performance, they are known to pour money into the schemes, increasing the total cash the portfolio manager has to put to work and remain idle cash in its fund. Though that leads to more management fees for the bank or institution that sponsored the fund, it can lead to problems because it is much harder to earn a good rate of return on Rs 12,000 crore than it is on Rs1200 crore . A mutual fund is prohibited by law to investing more than 5% of its assets, at cost, in shares of a single company.

Not booking Periodic Gains

Usually, investors don’t book profits when the market is rising. Instead, they shift their target upwards. They set to realize in only when the markets undergo a correction and they end up losing their gains or even a part of their principal.  One should invest in equities with a long-term perspective, yet, periodic booking of profits is essential, especially in these volatile times. Unless an investment is redeemed, the profit remains only on paper.

Ways to Improve Your Mutual Fund Performance

There are two popular options investors might want to consider. The first is, for all mutual fund investors, the safest way to improve mutual fund performance is to lower the expenses ratio you pay for your investments and investing through direct plans of funds makes sense when investors are certain that going through an intermediary offers no value. But, there are few steadfast rules while enrolling direct purchase plan, meaning there are always exceptions, here are financial planners or advisors that might help you improve your mutual fund performance, albeit direct ones will have higher returns than indirect plans of the order of 0.4% to 0.7% per year. Investors should maximise value but you have to decide whether over ten years this differential is large enough to forego the advisory services of planner or depend on the mercy of fund performance itself.

It is crucial for investors to know when to sell and realise the gains, especially if they have to reach financial goals. To preserve notional gains made in the equity markets from any future volatility and, at the same time, maintaining a predefined asset allocation structure and tactical rebalance portfolio time are the core keys to beat the benchmark of sensex.

The answer depends entirely on what services your financial advisor offers you and whether you can substitute them yourself. Ideally, an advisor would be helping you with investment advice as well procedural help. If you don’t think that these are worth the extra money and you are confident of your do-it-yourself abilities, then you should go direct.

PS: This article got published in Hindi Dainik Bhaskar on 15-11-2016