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Should You Trade In Mutual Funds As You Do In Stocks? - Outside View by PersonalFN

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Should You Trade In Mutual Funds As You Do In Stocks?
Jun 10, 2017

The stock market is perceived to be a den to make quick money. Sections of the media, especially glamorous business channels, are seeding this erroneous idea among people, making them wear the traders' hat.

The fact is, a 'trader' is only good to until his last trade. You don't know what the future has in store - good, bad, or ugly. Meaning, it is not necessary that every trading call would create wealth.

Please note that, a stock market is not a casino to gamble ...and if you wish to do so might as well visit Macau, Las Vegas, and likes, which are far more fun places.

The stock or equity market is an effective channel of wealth creation, of course; however, when you enter it, the utmost discipline, dexterity, and seriousness is required. Simply, because it is a matter of your hard-earned money, which you should not put to undue risk.

  • "If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes" said Warren Buffet, a legendary investor.

So, always choose long-term investments as against short-term trading; because the latter may prove hazardous to your wealth and health.

When you buy stocks (which are direct way to invest in equities) construct the portfolio in such a way that it can help you accomplish your financial goals, and not in a way that induces you to 'trade' based on the khabar or a tip on Dalal Street. If you don't have the competence to invest directly in stocks, seek research services offered by an independent and unbiased research house.

Alternatively, you may opt to invest in equity mutual funds owing to the merits such as:

But remember that selecting mutual fund schemes for your investment portfolio is not alike buying vegetables from a grocery store. You ought to adopt a scientific and rational approach to select the best mutual fund schemes of the hundreds out there and not always go by the smooth persuasive pitch of mutual fund distributors / agents / relationship managers.

Broadly, here are 10 checkpoints for the right decision:

  • Is the fund sponsor, a person(s) / entity of integrity;
  • What is the investment philosophy, processes and systems followed at the fund house;
  • What are the investment objectives of a respective mutual fund scheme, and whether it matches yours;
  • The investment style followed by the fund house or a respective scheme;
  • The experience and the track record of the fund management team;
  • How has the performance of the fund been;
  • How much is the expense ratio;
  • How much is the exit load;
  • What are the tax implications of your investments; and
  • What is level of investor services and transparency

But given our experience in mutual fund research over decades, we have to say that there are more nitty-gritties involved to select the best mutual fund schemes. And here's where PersonalFN research service, FundSelect comes to your rescue. We do all the gruelling, hard-core mutual fund research to recommend to you the best equity mutual fund schemes for your portfolio, and also highlight the underperforming or average performing ones too. We've discovered the secret to beat the market by a whopping 70%! So, effectively you don't need to 'trade' to make handsome gains.

Trading is not synonymous with mutual funds, yet many attempt to time the market while buying them. While, it is not 'timing', but the 'time in' the market that definitely matters for long-term wealth creation and to achieve the financial goals envisioned.

Thus, don't look at the fund's NAV while transacting in mutual funds. The NAV of a mutual fund scheme is by no chance a valuation metric. There's no way you determine a fund's NAV is high or low, as it represents a basket of securities from different industries where multiple metrics are needed to accurately value the business.

Similarly, neither is the NAV a performance indicator (although integral for calculating returns). A higher NAV does not indicate that a fund has performed better than another with a lower NAV, nor does it signal the potential to earn better returns. This is because when you invest in a mutual fund, you buy units at its NAV, i.e. the current market price of all the assets that the mutual fund owns; all it represents is the total portfolio worth as against the outstanding units.

Likewise, don't fall for the Rs 10/- proposition that comes with New Fund Offerings (NFOs). You cannot expect listing gains in a mutual fund scheme. It is important to understand that a NAV of Rs 10/- during the NFO period is just the starting price. There is no underlying valuation of the fund for the price you pay. When a fund house comes up with a NFO, it is simply collecting funds from you, pooling it, and further investing it in securities. How the NAV pans out is subject to how well the fund manager has constructed the portfolio and controlled the risk involved.

Therefore, a drop or spike in NAV of your mutual fund scheme should not compel to buy or sell your mutual fund holdings, steal your peace of mind, and/or give you jitters'. Instead when you transact in mutual funds, pay heed to host of quantitative, qualitative, and fundamental factors viz. performance---which includes returns, performance across market cycles, risks, risk-adjusted returns, comparative analysis--- portfolio characteristics, fund management style, costs (expense ratio and exit load), investment processes & systems followed at the fund house, among many other factors.

Don't get swayed by the nonsensical rhetoric of some business channels and the so-called experts appearing on their shows, mutual fund distributors / agents / relationship managers or even your friends and family who would induce you to churn your portfolio on an illogical premise.

Amid times where the Indian equity market has scaled new heights, opting for the SIP or STP - the two modes of investing - would be a prudent approach / a strategy to mitigate the risk and volatility, instead of timing the market and going gung-ho. Systematic investing infuses a sense of discipline to regularly save and invest, facilitates rupee-cost averaging, and powers your portfolio with the benefit of compounding.

Invest your hard-earned money prudently with diligent consideration to your risk profile, financial goals, and the asset allocation that's best suited for you. Take sensible decisions and be in complete control of your investments.

Happy Investing!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Should You Trade In Mutual Funds As You Do In Stocks?"


Jun 22, 2017

yes. mutual fund shd keep money in account till request is made. this will help in reduction of transactios
only those investors who ask for payment shd be paid. otherwise like stockbroker it shd function

Equitymaster requests your view! Post a comment on "Should You Trade In Mutual Funds As You Do In Stocks?". Click here!

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