5 common investment myths
Dec 21, 2006

Author: PersonalFN Content & Research Team

Few would dispute the fact that investors find themselves in a situation wherein there is an overload as far as investment choices and advice is concerned. And this overload has led to the rise of a number of investment myths. Investment advisors and agents use these myths to their advantage by luring investors to buy mutual fund schemes which will fetch them (investment advisors and agents) heavy commissions. As a result of this practice, the investor's interest is often compromised with. But there is a way out. Below are the common investment myths, investors have in their mind which leads them (investors) to make inappropriate investment decisions.
 

  1. Rs 10 NAV (Net Asset Value) makes a cheaper buy

    Earlier in the era of entry load (i.e. before August 2009), mutual fund houses used to pump in New Fund Offers (NFOs) and distributors too, used them as a means to make a quick buck. But ever since the ban of the entry load in August 2009, the NFOs have dried up.

    Investment advisors often use the Rs 10 net asset value (NAV) as a factor in their sales pitch. The common myth which eludes the investors is that buying into the fund at Rs 10 makes it a cheaper buy. Nothing could be farther from the truth. The NAV is simply representative of the assets backed by each unit of the mutual fund. NAV is expressed as the total assets less liabilities divided by the total number of outstanding units. Hence a Rs 10 NAV (offered by an NFO) is no cheaper than say a Rs 100 NAV (offered by an existing fund).

    The rationale of buying cheap, works in equities wherein the book value (the stock's intrinsic worth) is different from the market price (wherein market sentiments are also factored in). However in a mutual fund, the book value and market price are not divorced from each other. They are both represented by the NAV.
     
  2. The long-term always pays off

    We have always been strong proponents of long-term investing in equities and equity-oriented avenues. However, along with the long-term investment comes a caveat investors should be invested in the right avenue i.e. in case of, say mutual funds, the right schemes. A bad investment stays unchanged even over the long-term. Investors who added sector funds to their portfolios at the peak of market rallies (for instance, technology funds in 2000) will vouch for this. An upsurge in stock prices across the spectrum holds the potential to turn even a bad investment into a profitable one, but then investors would be relying on good fortune to succeed. And that is certainly no way to manage an investment portfolio.

    Alongside a long-term investment horizon, being invested in the right investment is equally pertinent. Investors would do well not to bank only on the long-term investment horizon or good fortune, while getting invested.
     
  3. Universally suitable investment avenues exist

    In the world of investments, there is no such thing as a universally suitable investment proposition or one investment avenue for all. An investment can be termed as being ideal, if it is in line with the investor's risk profile and can contribute towards achieving his investment goals. Investing is a personalised activity and what could be right for one investor can be completely unsuitable for another.

    For example, a well-managed diversified equity fund with a fantastic performance history over a longer time frame and across market phases can make an apt fit in a risk-taking investor's portfolio. But the same fund may not find a place in the portfolio of a 70-Yr old gentleman who has no appetite for taking risk and accords importance to assured and regular income along with safety of capital invested.
     
  4. SIPs are always right

    At PersonalfFN, we have always maintained that investors should invest using the systematic investment plan (SIP) route. However, SIPs need not always succeed or deliver the expected results. For example starting off a SIP (in isolation) without any investment objective or a SIP in a poorly managed fund is unlikely to serve any purpose. Similarly, a SIP which runs over shorter time frames (like 6 months) may not even help lower the cost of investment, if the same coincides with a bull run in the markets.

    The key lies in being invested via a SIP in a well-managed fund, in line with a broader investment plan and for a longer time frame for at least 3-5 years. SIP should be seen as a means for achieving one's financial goals and not an end by itself.
     
  5. There is no such thing as too much diversification

    Diversification across asset classes and investment avenues is vital. By doing so, investors can ensure that investment portfolio is shielded from a downturn in a given asset class / investment avenue. However, it is also pertinent that an optimal level of diversification be maintained.

    Case Study: Too many funds spoil it

    At times, investors tend to stretch diversification to absurd levels, by investing in just about any fund that comes their way. Often no thought is paid to the value, which the fund can offer to the portfolio or even the fund's aptness. Eventually, investors are left with a portfolio that is fragmented. There is a cost associated with mutual funds, both in terms of money (expense ratio) and time (to regularly track the funds). Instead, the right approach would be to have a well-diversified portfolio constituted of not more than 6-7 funds, from well-established fund houses following prudent investment processes and systems.


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