1. Investing in NFOs in order to buy units at par value:
This is either a rookie mistake on part of the investor or deliberate mis-selling by the distributor or financial adviser. Par value of a mutual fund unit is meaningless, because the unit by itself has no value. The unit derives its value from the underlying of stocks or bonds or a combination of both.
Funds whether NFO or launched some time back, invest in the same universe of stocks at market price. The absolute value of the unit at which the investor invests in the fund is in itself irrelevant. It is true that you can buy a larger number of units by investing in the NFO. But as discussed earlier, the unit by itself has no value. The growth in the Net Asset Value of the unit, over a period of time is relevant.
2. Funds with high NAVs are overpriced and funds with low NAVs are attractively priced:
This is similar to the misconception described above. Mutual fund units are not stocks, where a low share price may sometimes, not always, mean that the valuation of the share is attractive. At the cost of repetition it is important to reiterate that, a mutual fund unit in itself has no value. It derives its value from the underlying assets in its portfolio.
3. Investing in funds which gave high returns last year:
Recent performance is not always a good indicator of future performance. Paying too much importance to recent past performance and ignoring long term performance and other performance factors like, fund manager’s track record, portfolio composition etc is risky. You may be selling a good fund and moving to a not-so-good fund.
4. Funds that declare high dividends are better:
This is another misconception. The dividend that the fund pays is adjusted from the NAV. There is no benefit in getting a big dividend. The objective of mutual fund investment is to grow your wealth in the long term. You should be very clear about your investment objective.
5. Allocating a big portion of the portfolio to thematic or sector funds:
Investors sometime take a big exposure to thematic or sector funds, based on recent high performance. It is better to invest in diversified equity funds for long term financial objectives. Sector funds are exposed to sector specific risks, and as such are more risky than large cap or diversified equity funds. Over a long period of time, sector funds cannot outperform diversified equity funds. If you are investing in sector funds, you should ensure that you book profits at the right time.
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