That particular day, for few minutes, I felt like a school teacher. One of my family friend brought his son to my office and started complaining. The son has around 3 years of experience in an IT industry, started investing on stocks from his savings for the past 1 year. What is wrong in that? Why is the father complaining?
The son has been watching the mutual fund ratings every now and then and changing his funds according to the waves that are shown in the graphs. After analysing the trend he has been investing, he seemed to have lost a huge sum. Like many youngsters, he didn't want to listen to his father and the father brought him to hear from me.
What happens when you frequently change the funds from one instrument to another?
Most of the times, looking at the ratings, the investors either sell or buy some instruments. For example, looking at the high ratings, one may buy a particular mutual fund which may not do well in the following years or vice versa. So, you lose a lot.
Buying a mutual fund on January and selling it on February, just because it has gone up a bit in 1 month will not help to gain sufficient profit in the long run.
There are investors who wrongly 'time the market' lose money in the long run. Selling a property to invest on some mutual funds or vice versa, just because the market is up for some temporary reasons or due to herd mentality, the investors end up with a huge loss.
How can one escape from changing the funds regularly?
There are measures one can follow to earn a nice profit and avoid changing funds regularly. The friends, fellow investors, internet, websites and other tools give away loads and loads of information nowadays, it becomes extremely easy for the investors to get carried away. It is very important to learn how to use this information effectively in order to gain profit.
Consider the ranking:
Looking at the ratings or the rankings about how a particular stock or mutual fund performs is definitely a good option. Especially, when you are a beginner, the ratings/rankings are the best measures that can help to identify the best performing stocks or mutual funds. Where does the mistake occur? Blindly following ranking is where the investors make a mistake. Remember, rankings do not stand still and always keep changing. A slight up or down for a short period here and there should not be considered while making the decisions.
Consider Mode of Investments:
It is very important to understand the mode and period of investments too before changing the funds. Low or high ratings/rankings perform differently depending on the mode you have invested on any particular instrument. The investments will give out different results depending on the mode you are investing on. For example, there will be a big difference when you have SIP running in any funds than when you invest a wholesome in the same fund. Be careful while changing the funds.
Consider the rating methodology:
Understand the rating methodology each company uses to rank the funds. There are different styles such as 'value investing', 'growth' and 'blend' suit different investors depending on the investment period and the pre-set expectation about the returns. Choose the right one that helps to accomplish your investment goal.
Consider other yardsticks:
Apart from ratings, monitor the yardsticks like NIFTY, BSE Sensex or NSE while investing on mutual funds, equity funds, etc., At times, due to the wider range of these yardsticks, you can find out how the performance of the top rated funds vary from time to time. You can also learn the reasons and the trend about how each fund performs. It will help you in better decision making.
Consider Long Term Performance:
Always look at the long term performance of the funds. You can take the best decision when you analyse the performance of the funds for more than 3 or 5 years or more than that. You will also find out that there are funds which perform extremely well in 7 or more years but might not have given any fruitful returns in 3 or 4 years.
I have witnessed some investors strictly following the ratings and change the funds sincerely. Frequently changing the funds from here and there will only lead to wasting lot of time, energy and money. Analyse well, keep a methodology and invest appropriately!
(Ramalingam. K an MBA (Finance) and certified financial planner. He is the director & chief financial planner of holistic investment planners)