5 myths to avoid while choosing a Mutual fund

Whenever a discussion on mutual funds comes up, I am surprised to find myself negating the same misconceptions over and over again. So I decided to elaborate on some of the common myths in this post.Funds target

Bur first, we should be clear on what an NAV is. A New Asset Value or NAV is a mutual fund’s price per share, or exchange-traded fund’s (ETF) per-share value. The mutual fund’s per-share dollar amount can be easily calculated by dividing the total value of all the securities in the fund’s portfolio, minus any liabilities, by the number of fund shares outstanding.

Lets now look at some of the common mistakes that should be avoided when choosing a fund:

Myth # 1: Lesser the NAV better it is! Remember that the NAV (20 or 200) of the fund has nothing to do with the quality of the fund. It is possible that higher NAV fund is better; you need to look at the portfolio, management and fund performance for the last 5 to 10 years.

Myth # 2: Look at the last 6 months to one year performance! It is possible different funds perform better at different point of time. For example: HDFC top200 was the top performing fund in 2009-10, it went through a long slump for close to four years, before it started picking up. If you would have bought HDFC top 200 during 2009-10 time period, your CAGR would have been less than 10% for close to 4 years

until 2013. You need to look at the one year, three years, five years and even ten year performance of the fund. It is also critical to see how the fund performed during the down periods (2009-13).

Myth # 3: Cost factor. At times deciding to buy a fund because of less expense ratio (typically between 2% and 3%) can cost you dearly. More weightage needs to be given to the fund manager’s background, churn ratio and past performance.

Myth # 4: Going for the hottest sector funds, Infrastructure funds were hottest in 2008-09, but they severely under performed for next 5 years. As much as possible, long term investors need to avoid sector funds.

Myth # 5: Taking agents suggestion for granted. It is possible that agents are incentivized to sell the new NFO. Do your due diligence before deciding on the fund!

If you need to do more in-depth study, here are two good resources for researching on the Mutual Funds



Do you think that there are any more myths that surround mutual funds?

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