Things you should know before investing in MFs

There are many instances in our life when we come across salespersons, who openly call themselves ‘financial advisors’, trying to make you fall for their sales pitch. You succumb to their persuasion and end up investing in a particular mutual fund scheme or any such investment product, thinking that the so-called ‘financial advisor’ is thinking about your benefit. However, the truth is far from what you think. There is commission or brokerage attached to such products, for which, they try to lure you and make you invest in the products that may not be suitable for you. Though not all financial advisors are the same but then, the count of such financial advisors is not less.
 
Next time, before investing in any mutual fund scheme or any such investment product, keep certain points in mind that is not usually revealed to you by your mutual fund distributor or your so-called financial advisor. They are as follows:
 
1. “I am selling you one of the most expensive funds” 

Nothing is free when it comes to investment. There are chances that the fund, MF distributor is pitching you, is expensive.  

2. “I don’t care about asset allocation” 

Say you have most of the amount invested in fixed income securities, and then, it makes sense to invest in equity mutual funds. On the contrary, if you have already invested in equity mutual funds, then it is advisable to also have a certain allocation towards debt mutual funds.
 
Very rarely, your MF distributor may advise you this way as they try to sell mutual funds through which, they earn more commissions. For instance, equity mutual funds and new fund offers (NFOs) fetch higher commissions than debt mutual funds. In fact, liquid funds are among those funds that fetch the least commission for the distributor.
  
4. “Cheap doesn’t mean good” 

 There may be many instances when MF distributor comes to you and tells you to invest in a particular NFO explaining that you will get one unit for just Rs 10 and that it is cheaper than any other fund out there. Further, he may even say that the scheme is managed by a particular star fund manager and this scheme will also perform. First of all, it is important to understand that cheap does not mean good. 

Let’s take an example to understand this. Suppose there is Fund A, an NFO with NAV of Rs 10 per unit, and another Fund B with NAV of Rs 20 per unit. Assuming both have invested in the same companies in the same proportion, NAVs will rise proportionately with the rise in the share prices. If both rise by 20 per cent, then, Rs 10 will become Rs 12 while Rs 20 will become Rs 24.
 
So, the kind of companies that the fund manager has invested in, matters and not the NAV! Do not be under the impression that the NAV of Rs 10 would rise to Rs 100 overnight. If the fund manager’s stock selection goes wrong, then there is also the possibility of the NAV of Rs 10 falling down to Rs 8.