Chasing best mutual funds could be a trap

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Many financial Journals, magazines and websites promote the concept of best funds of the year, star fund managers, best fund houses etc. They keep publishing the names of what they tout as the best funds to invest in. Furthermore, there are investment advisory companies and banks, who in the name of advisory, give buy recommendations of what they brag as the best funds and suggest dumping those funds which are not part of their so-called world-class research list. Their modus operandi is that they approach an existing investor with a sizable portfolio and give a scathing review of the portfolio. Then they recommend selling nearly all the existing funds and buying new funds. The trick is to sell the existing portfolio because sticking with that will not fetch them any commission. But reinvesting under their code will yield them good brokerage and a sizable portfolio instantly. What clients get in turn? Taxes, exit loads, disturbing a reasonably good portfolio and end up having funds which are likely to underperform in the near term. Yes, the chances of underperformance are quite high for funds who are the top performers in the recent past. Funds generally follow “reversion to the mean” concept meaning the chance of outperformance is quite slim for funds which have outperformed in the recent past.

Many times, they recommend redeeming your existing funds and buying NFO (New Fund Offer). They exploit the misconception that it’s better to buy a fund whose NAV (net asset value) is Rs 10 compared to a fund whose NAV is say Rs 100. Fact is- In almost all cases, it’s better to buy a high NAV fund if the nature of both the funds is similar.

That’s the pity of financial industry. Most of the segments are taking advantage of financial ignorance of the investors. Many investors who are otherwise doing very well in their respective careers, find investments in mutual funds and shares very complex and boring. They generally trust the bank and other big names. Unfortunately, the wealth advisory of most of the institutions is geared towards exploitation and manipulation.

Yes, you need the services and advice of the advisor. But you have to find a way to judge whether your advisor has a high ethical standard or working under some hidden agenda in the guise of advisory.

Manoj Pandey