Avoid these 7 sins in Mutual Fund investments!

You have probably come across the Seven Deadly Sins popular in moral teachings - wrath, greed, sloth, pride, lust, envy and gluttony.

The investing world too has its version of the 7 deadly sins. Indulging in them can mean unpleasant consequences for one’s financial life. Whereas recognizing these investing “wrongs” and avoiding them can help you become a better investor and aim for financial bliss.

Fear – only safe securities for me; no equities please

The fear of losing prevents so many investors from doing what is appropriate for them. “Equities are extremely risky. I don’t invest in them. I just prefer bank FDs.” Part of the problem stems from misconceptions and the lack of proper awareness.

It is true that in market linked securities like equity shares the value is not fixed unlike bank interest rates. Their value is derived every day by market participants – other retail investors like you and the institutional investors – based on the fundamentals of the share and also expectations of its future performance by these participants. However over long terms the fluctuation in returns from equities is generally less compared to that over shorter periods like 1 year or 3 years.

Equity mutual funds invest in a basket of shares that the fund management team selects based on their research. An investment portfolio that does not have appropriate exposure to equities might not grow large enough to help adequately meet an investor’s long term goals like retirement income due to the reality of inflation growth in our economic society.

Greed – overinvesting in a risky asset or holding on for too long

Sometimes investors may be so impressed with the performance of certain investments that they’d be happy to concentrate their entire portfolio in that particular scheme/asset. However the principle of asset allocation requires one to diversify their investments across assets like FDs, equities, gold etc. No one can afford to have their entire portfolio in equities alone.

Those who invest in sector funds or mid cap funds, seeing the stellar returns they give in favorable market cycles, could make the costly mistake of investing more than their risk appetite would have permitted them to. As such, sector funds are cyclical whereas mid cap funds are more volatile and this adds to their riskiness.

Finally greed also is at play as we hesitate to book profits when we’re supposed to, as we near our investment goals. Sometimes we may be tempted to hang on a little longer, especially when markets are doing really well, to rake in some more profits.

Sloth – failing to do the homework, and rebalance

Investors often fail to do enough background check of the scheme they invest in. They are happy to go with the brand name (AMC), fund manager’s name or recent past performance. The ideal sequence of choosing a scheme would be to

i. identify the type of scheme based on investment goal, risk appetite and time horizon,
ii. identify a suitable scheme with low expense, consistent past performance
Expenses are an often overlooked parameter yet they have a big impact on end returns in long term investments.

Another aspect of slothfulness is not rebalancing one’s investment portfolio. The investments which you make across your earning phase would be meant for various goals such as buying a home, education & marriage of kids, your retirement etc. At a given time some of these goals may be close, some far. Your portfolio might require rebalancing from time to time to cater to these time-spaced goals.

Similarly when markets are undergoing high volatility for prolonged period investors might do well to revisit their fixed portfolio allocation and check if change is required.

Pride – being overconfident about your investment choices

Sometimes when we are met with an occasional success in an investing bet it’s easy to feel like we’re really “smart investors”. However unless you are qualified with knowledge and experience it is best to avoid bets. In investments it is smart to find safety in numbers.

So is important to be invested in more than 1 equity scheme and not focus all investments in a favourite one. In fact that is the logic behind Quantum AMC offering the equity fund of funds scheme and that is the reason why we like to encourage investors of our flagship equity scheme to add the equity fund of funds scheme too in their investment kitty.

Lust – chasing recent good performances

Often investors are caught in the “herd behaviour” in market runs and they cease to care about reason. All that matters is the present sentiment. Not many would actually bother to pay heed to logic and fundamentals.

It is very interesting to think of investor behaviour that caused some of the greatest market bubbles in history. The first major financial bubble and perhaps the most ridiculous one ever, was the Tulip Mania, during 1964-67 in Holland. It is said that, at the peak of the market, a person could trade a single tulip flower for a piece of real estate property, and at the bottom, one tulip was the price of an onion!

This is not to suggest that herd mentality of investors is the cause of every market surge; a bull market could well be supported by fundamentals. Investors need to be sure of the rationale in order to take correct investment actions in market runs.

Envy – wanting to mimic the neighbor

It’s always great to admire the investing skills of a colleague or friend. However the tendency to want what other investors have achieved could lead you to take risks not suitable for your profile. Each person’s goals, financial background are different and so the strategy that worked for one may not necessarily be great for another.

Investors should work with a financial advisor who would study their financial background, investments goals, risk tolerance and chart out a plan.

Wrath – excessive displeasure about an investment gone wrong

Investors who have experienced failure in the past may develop extreme aversion to those types of investments in the future. It could be a case of mis-selling, poor selection or hasty decision making. Such investors might blacklist the asset class totally and even become campaigners-of-sort about the so-called negatives of the product/asset type.

If unfortunately you have been faced with failure in any of your investing experiments it would be worthwhile to calmly analyze the cause, about what went wrong and take corrective actions, instead of abandoning it and giving up on it.

Most of the transgressions discussed above are linked to emotions. Ideally we should de-link emotions from investments and try to make our investment nature rational. This comes with practice.

A good financial advisor can act as a coach helping you focus on the principles of good investing and take you on the path to financial bliss.

Above article is authored by Quantum.

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