Financial products such as mutual funds have become highly popular in the recent decade. However, many investors are ill-informed about mutual fund schemes. Hence, novice investors are at the risk of being duped by someone who makes a commission by selling these products.
Here are some red flags to look out for when investing in mutual funds by striking a relationship with agents or financial advisors.
#1 “The terms new fund offer (NFO) and initial public offering (IPO) are the same as each other.”
NFOs and IPOs are two distinct types of financial instruments. An IPO is when a private company goes public by selling its stock to the retail investors. In parallel, an NFO is when an AMC starts a new scheme to raise funds and sells fund units to investors.
This money is used by AMCs to purchase securities such as stocks and bonds. Companies raise capital through an initial public offering (IPO) to expand their firm or lower the promoters’ ownership.
Both sound similar, but NFO returns are determined by the companies in which the scheme’s fund management has invested, as well as current market conditions. The profitability of an IPO is determined by the company’s fundamentals, stock valuation, and liquidity.
#2 “In the last year… “
While it is true that the last year’s returns are appealing, practically all existing mutual fund schemes in the country performed well. This is due to a big rally in the stock market in 2021.
However, it’s always best to compare returns over longer periods of time, such as three years, five years, and so on, to see how consistent they are.
Additionally, select funds based on your risk tolerance. A series of questions, such as the investor’s age, income, and financial dependencies, can be used to assess the risk profile. These responses will assist you in determining how much risk you are willing to take.
#3 “The Net Asset Value (NAV) is zero.”
To begin, net asset value (NAV) is the cost of a unit of an MF scheme, analogous to the price of the stock.
When the equities held by a mutual fund scheme perform well, the scheme’s NAV rises. However, you should not base your investing selections solely on the scheme’s NAV. Comparing NAV isn’t the ideal criterion because it doesn’t provide any guarantees. No matter what the NAV is, if a fund has good companies in its portfolio, it will offer good returns.
Focus on the fund’s long-term returns rather than its NAV.
#4 “You should diversify your investment portfolio. So, here’s another fund to consider.”
Most investing experts believe that an average investor’s mutual fund portfolio should contain no more than four schemes, including tax-saving schemes. When investing a small sum, it is usually preferable to have a well-defined portfolio to maximise profits.
If your advisor advises you to invest in more fund categories, be cautious.
Diversification refers to distributing your money over a variety of assets to reduce overall risk and maximise returns on your investment portfolio.
Over to you
Now that you’ve learned the four red flags to look out for when investing in mutual funds, it’s time to be cautious and put the lessons into effect. If you are looking for a simplified and intuitive platform to make MF investments, download Tata Capital’s Moneyfy app. Start investing today!