Avoid these common mistakes to maximise your returns in mutual funds


In an era marked by market volatility and global headwinds, investing in mutual funds has become a popular strategy for many Indians looking to grow their wealth. However, as Rahul Jain, President and Head at Nuvama Wealth, emphasises, there are several common mistakes that investors should be aware of to make the most of their investments.

Jain highlights that one of the most fundamental principles in wealth building through mutual funds is asset allocation. By diversifying across equity, fixed income, and gold, investors can reduce risk and enhance portfolio efficiency. However, many investors overlook this fundamental principle, often becoming blind to risks in rising markets and missing opportunities in declining ones.

Another common mistake Jain identifies is over-diversification. While diversification is essential, holding too many mutual fund schemes can be counterproductive. “Having too many schemes in your portfolio makes it challenging to monitor them effectively, leading to inefficiencies,” Jain warns. Investors should aim to strike a balance, ensuring they are diversified enough to manage risk without spreading their investments too thin.

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Moreover, Jain advocates for goal-oriented investing. Having a clear objective helps in planning cash flows and determining the right amount to invest. He also stresses the importance of seeking professional advice if investors are unsure about selecting mutual funds or monitoring their performance.

While many investors focus solely on the returns of underlying assets, Jain argues that this is not enough. He believes that the skills of the fund manager, the processes used by the fund management team, and the consistency and quality of returns are equally critical.

When it comes to evaluating mutual funds, many investors focus primarily on past returns. However, Jain stresses the importance of looking beyond short-term performance. “While past performance is an important parameter, it’s not the only thing to consider,” he points out. Jain encourages investors to consider the fund manager’s strategy, the quality of the returns, and the consistency of performance over a longer horizon.

Below are the excerpts of the interview.

Q: We are talking at a time when we are seeing a lot of volatility in markets. There are global headwinds as well. So at this time, it’s very important to understand what not to do as well. So let’s start with the basics. What are some of the most basic mistakes an investor makes while investing in mutual funds?

Jain: Mutual fund as a vehicle or instrument or a category, has allowed a lot of Indians to invest into equity markets and finally be part of the Indian growth story. And while I think the momentum around Mutual Fund is going up, I think there are certain mistakes which we see often. I think the first and foremost is that the core philosophy of building wealth or growing your wealth over a long period of time is using asset allocation, where asset allocation means that diversification between three large categories- equity, fixed income or debt, or gold. I think that is the best way of diversifying your portfolio. It is also an automatic way of reducing risk on your portfolio.

There is a common saying that- in markets which go up, you generally become blind to risk and the market when falling, you become blind to opportunities. And I think by using asset allocation you avoid all that and you can do vice versa of the same. I think that is one thing which every mutual fund investor should follow.

Second mistake is, we see a lot of mutual fund investors who have large number of schemes. I would say that over diversification or having too much of schemes or mutual fund in your portfolio can be very ineffective because your ability to monitor them becomes very difficult, very challenging and that is where your portfolio becomes inefficient.

Third, I would say it’s not a mistake but I would say that we always advise that while you invest in mutual funds you should always have a goal and objective. If you don’t have, you still can start but having objective will always allow you to plan your cash flows, what amount of money you should invest if you have a goal objective and then you can work around that accordingly.

Fourth, again it’s not a mistake but what we keep telling is that if you don’t understand on your own, I think it will always be better to take advice from someone who can help you out in selecting mutual funds, selecting schemes. The other important part is to monitor and regularly review. So these are four things which I say that can be common mistakes or something which people should look out for.

Q: The next question is the usual understanding of mutual funds, it is that they track returns of an underlying- be it equity, be it debt, gold or a mix. You said asset allocation is important but do you think that much understanding is enough and you don’t need to go beyond that?

Jain: I would say that yes tracking to the underlying is important because while you’re investing in something, having a benchmark where you can compare it to is important and critical. It’s always good to have a benchmark where you can compare it to. But it’s not that in complete sense. I would say that the fund manager, his skills, the practices or the process that the fund management team uses is also very critical and very important while you look out for the mutual fund performance.

I would say that the consistency and the quality of the returns is very critical and important and just tracking to the underlying might not be the only thing.

Q: Sometimes what happens is when somebody is looking at mutual funds, the first thing that they look at is past returns. What has the fund done in the past? But is that enough to decide whether you should invest in a mutual fund or not?

Jain: When you are investing in a mutual fund you have to look at future because whenever you invest you have to look at future and you have to look at the fund manager thesis, his strategy, his thinking, his thought process on the same.

But looking at past performance is also very important because there has to be some benchmark, some thought process, thinking on how to evaluate something and in that sense past performance is an important parameter to look at.

So while you look at past performance, you should look at funds which are consistent and which have quality. So one of the thing is that there are a lot of people who go and invest by looking at 12-month returns. I would say that not just 12-month returns, look at a 3-year and 5-year horizon as well.

Another thing is that you should also look at a mutual fund which has done outperformance over the benchmark or has been in top quartile in a large part of their quarter. So that is where consistency also comes into picture. So while you look at past performance, you should not get biased by just looking at the short-term performance. Having a longer-term performance also into context will be important and critical.

Watch accompanying video for entire conversation.



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