Dos and don'ts of investing in MFs

Most of us like to try out new things whether its dining at restaurants, buying mobile phones and cars to name a few. Some go to the extent of changing mobile phones every one year and a car every three years. Well this is a matter of personal preference and lifestyle and might give you some kind of emotional happiness which is good in some sense.

But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential.

• 7 tips to make BIG money
  

To put it simply most of the new fund offers are old wine in a new bottle. They are packaged very smartly with fancy marketing ideas to entice the client to buy. There was a deluge of new fund offers in 2005 and early part of 2006.

Securities and Exchange Board of India on its part took a series of steps. First, Sebi objected against the use of the word IPO (initial public offer) and instead had every fund house use NFO, to confuse with stock IPOs, to curb rampant mis-selling of new funds.

Secondly, Sebi had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6 per cent initial issue expense.

• How to choose the right mutual fund

This is precisely one of the reasons why most of the mutual funds have been launching closed ended New Fund Offers so they could pay a higher brokerage of around 5 to 6 per cent to distributors.

Thirdly, Sebi has taken note of this deluge of similar funds being launched and made it mandatory for the trustees of Mutual Funds to personally certify that their new schemes are different from the old ones. Despite this some of the fund houses have been launching me too schemes.

Some fund houses such as DSP Merrill Lynch have not launched any new offering in the last 12-15 months, except for the Super SIP (which was a genuine attempt to offer something new that was relevant), whereas others such as Tata Mutual Fund and SBI Mutual Fund have been strong contenders for the Top Slot in the New Fund Euphoria.

So the question boils down to "How does then one decide if the new fund offer of the so many being launched every other month is suitable for me". 

Before answering this question, first 3 common mistakes all investor should be aware of:

Too less or too many aren't good enough
I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification.

After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good.

At best based on the size of your portfolio, spread your investments across in 4-9 different funds spread across different mutual funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well.

Rs 10 NAV is not cheaper than Rs100 NAV
What you should be concerned about is the per cent fall or per cent rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation.

Don't fall for fancy terms
Don't fall for fancy and general terms such as 'investing in India's growth potential', 'options and derivatives to diversify your portfolio'. See if there are any existing funds with longer track records with similar investment objectives and strategies.

If there are, opt for the tried and tested ones rather than going from newer exotic ones.

How to decide if the new fund is an appropriate one for you?

Take a look at your Financial Plan if you have one or at your existing portfolio. What kind of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap funds, balanced funds, tax planning funds?

The next to see is how does this new fund really add value to my existing portfolio? How does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is a million-dollar question.

• Investment lessons from Sachin Tendulkar

Is this really a new fund with an interesting theme that might fit well within my portfolio? Understand the investment objective, strategy and asset allocation of the fund.

What has been the fund manager's track record of managing other schemes? Which are the other schemes managed by this fund manager? How have they performed in the past? Especially what has been his previous funds performance during tough times like the May 2006 mayhem, 2000 crash etc.

How stable is the investment team of the fund house and how many schemes are they managing? What is their track record of launching new funds? If the fund house is notorious for launching new schemes once every 2-3 months, you will be better off skipping such schemes or fund houses altogether.

7 GREAT investment tips for BIG returns

If after doing this, you still cannot figure out if you should opt for the new scheme, seek the advice of your financial advisor.

Just look at the track record of the some of the new fund offers launched in the last 12-18 months and compare with the some of the existing funds with a 5-10 year track record (marked in yellow)

We can arrive at the conclusion that indeed existing funds have surpassed newer ones by a mile and we would be much better off sticking to existing funds with excellent track records than running after fancy terms, names & themes.

In true Munnabhai style, "Old bole to gold".

The author is a practising Certified Financial Planner and runs 'My Financial Advisor' www.myfinad.com. He can be reached at amar.pandit@moneycontrol.com