The Ultimate Guide: 7 Commandments for Mutual Fund Investing

Posted On Wednesday, Nov 01, 2017


Not too long ago we had shared with you your rights as a mutual fund investor that you could use as an investor with Quantum. Knowing these rights will help you empower yourself and take good care of your investments. Moreover there are some important things that investor needs to know. It’s said choosing a mutual fund is like choosing a spouse. Investors need to know everything about the fund before taking the leap. In order to ensure you are investing your hard earned money in a fund that is best suited to you, there are 7 commandments you must know.

1. Know your Expense Ratio
While investing in a mutual fund is definitely not a humongous task (Yes, you read that right - to invest online with Quantum & check out our new invest online portal click here), it is important to take note of critical aspects like the expense ratio of the fund before you choose to park your hard earned money with fund houses. Since expense ratio is a charge deducted from assets, it is implied that higher the expense ratio, higher the charge on your investments. Also longer your investment period, higher is the impact of expense ratio on your returns.

This fact is demonstrated in the illustration below.
The below table shows how the value of Rs. 1 lac with 12% annual returns varies with different expense ratios. Fund A with lowest expense ratio has become Rs. 7,50,071 in a span of 20 years while Fund C with highest expense ratio has become Rs.5,81,370. The difference between the highest and lowest expense ratio is Rs.1,68,701.

Value of Rs 1 lac on 12% MF annual returns and various expense ratios
 Expense Ratio (%)5 yrs (in Rs)10 yrs (in Rs)15 yrs (in Rs)20 yrs (in Rs)
FUND A1.251,65,4912,73,8744,53,2397,50,071
FUND B21,59,3022,53,7704,04,2616,43,994
FUND C2.51,55,2792,41,1163,74,4035,81,370
 Difference in highest & lowest10,21232,75878,8351,68,701

Table used above is for illustrative purpose only.

In the above example, the difference between the expense ratios of the three funds is probably because of the higher commissions, management fees, marketing budget etc paid by the Fund B and Fund C. It is like losing Rs 1.68 lakhs over 20 years, i.e. about Rs 8,000 annually.

Expense ratio of direct plan funds are lower compared to regular plans since the former is bought directly from the AMC.

Difference in return gets magnified with a higher investment period so it would be prudent to pay attention to what their fund’s expense ratio is, especially as a long term investor.

2. Maintain Investment Discipline
Markets reach all-time highs and investors start to receive calls to either invest or even worse exit their investments and ‘cash in’. In an effort to make the most of the market rally, the mistake they generally make is to exit from their investments - investments which could have the potential to give them much more than they might have got at the time of exit. When investing, you need to understand, that it is very important to continue being disciplined and that investments should always be linked to your financial goals. This stands true, especially in the case of Equities.

Equities are more of a long term investment option, since equities as an asset class has the potential to give good returns over a long period of time (with higher risk). Therefore, it is advised that you hold on to four investments even if the markets are not moving in a favorable direction.

Moreover there is one way you can negate the effects of market cycles and also bring financial discipline in your investments – SIPs. Systematic Investment Plans or SIPs are said to be an ideal way for investors to create wealth in the long term.

3. Adequate Research Before Investing
Sure, distributors or advisors can be of a help when choosing a mutual fund, but you should ideally do some research on your own as well. With the advent of the internet it has become a lot easier to simply key in the name of the fund, check the pedigree of the fund, the performance etc before investing. One needs to understand, that investing, especially in equities comes with associated risk. Therefore basic research on which kind of asset class should you park your money in, whether the fund you are looking for has a good track record in the past, etc will help you be that much more confident while making the investment.

4. Never Compromise Financial Goals for Some Quick Gains
The tenure of your goal should determine which asset class you should invest your hard earned money. If the financial goal is for the long term then you should ideally invest in equity provided you have a high risk appetite, as equities have potential to to give higher returns with higher risk over a long term period. Investments should not be subject to any market up-swing or external influence. If your goal is shorter say one year then Fixed Income instruments may make more sense.

Investments made for retirement should not be cashed in only because the markets are on a high. Our advice to you, our investor has been to withdraw your investments based on need and not on greed.

5. Investment Decisions Based on Returns and the Risks Associated
Most people park their hard earned money across asset classes without as much as a second glance at their personal risk taking capacity. And that’s pretty tragic considering that their risk profile would be starkly different from that of their next door neighbor, on whose recommendation investors tend to buy stocks, when we hear that he has made gains of x%!

Always consider the risk involved while investing in any financial product. You should ideally look for sensible, risk-adjusted returns over the long term through a fund house that follows a disciplined research and investment process. Look at the track record of the fund house, and the process they have in place to ascertain the risk investors are taking, not how big the fund house is. Remember, the returns that a mutual fund could make, is not a function of size. The Risk-Return analysis is yet an important aspect of mutual fund investing.

6. Avoid last minute tax saving
Come the month of January, February and March and you look for ways to save tax. In our view tax investments in mutual funds through ELSS have dual benefits. First and the obvious being it helps you get tax exemption up to Rs. 1,50,000 and second is it helps you create wealth. However many investors miss this opportunity.

There are several advantages of starting early, say in Nov itself rather than in February:-
• You could save tax more efficiently and capitalize on investment returns.
• You can avoid the last minute paper work and mistakes.
• You can save small amounts regularly through SIPs and avoid the circumstance where you end up not having enough money to spare for a lump sum investment at one go.

7. Never assume that funds with higher NAV perform better
Sometimes you tend to link NAV to absolute returns of a fund. Therefore higher NAV is taken to be synonymous with higher return. This is not necessarily true. NAV sure is a tool to measure performance but NAV is not a performance indicator in itself. It is change in NAV of two dates that reflects performance of the fund in the period between those dates. However it is true that with age the NAV of a fund increases; that’s why older funds tend to have higher NAVs.

To conclude these 7 commandments are meant to help you take care of your investments and make the most of your hard earned money.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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