Why “Trading” in MFs is not the best thing to do

The reason people invest in Mutual Funds is because they don’t have enough time and the inclination to monitor and manage their own funds. They prefer handing their money over to a professional fund manager who would invest on their behalf in equities, debt, gold or any other asset class.

However several people, besides just selecting a good mutual fund, also tend to go one step further and try to ‘trade’ with their mutual fund investments and try to time the market. (Also read - How to become a better MF Investor?)

When they feel markets are high, they send in redemption requests thinking markets would come down and when the markets are falling they tend to panic and once again send in redemption requests thinking everything is headed for doom.

Or alternatively others keep switching from one mutual fund scheme to another within a matter of weeks. They exit one mutual fund and enter another; thinking they are being smart and can get more returns this way.

I know of one person who told me how he traded in mutual funds, and how he constantly kept track of different mutual funds. Every time a new fund offer (NFO) came to the market he exited his existing mutual fund investments to enter the NFO.

Now part of the reason people tend to trade and move in and out of mutual funds so rapidly is because mutual fund distributors and brokers promote this type of thinking. If you don’t move in and out of mutual funds rapidly, your broker won’t make any money. Remember that everybody works in his or her own best interest, and the best way a broker can make more money is by letting you churn your portfolio.

The entry load you pay is income for your broker. Of course many of you might have started investing directly in a mutual fund and might not have to pay the entry load, however things like exit loads would still prevail in the short term.

You might make more returns than a bank FD, even if you churn, but you can make much more if you don’t trade mutual funds. You can save the excess entry load and exit load, which you would have to pay. You can save time and effort.

And also the entire logic of investing in a mutual fun is to let the fund manager analyze and take care of your money. If market correct the fund manager has to decide what to do and not you. All you need to do is invest regularly in quality mutual funds. In case you have the time and inclination to do research, why not start investing directly in stocks after doing research?

Many investors ask me, “When is it a good time to exit our investments?” The best time to exit your investments is when you need the money or when you feel the investment has no scope to go up further. In case you feel the Indian economy and Indian companies are having fundamental problems in the long run, that is when you should exit your investments. (Also read - Is it time to sell your investments?)

Always remember that no matter what investment you make; in the longer term risks always reduce if you have invested in quality. In order to be truly wealthy you need to have a long-term vision and belief in India’s economic growth.

A lot more needs to be done in our country and this might be a challenge to a few, but for investors like me this is a wonderful opportunity. Since I have the time and passion to learn I invest directly in stocks. I started investing with Rs. 750 when I was sixteen years old and by the grace of God the Indian markets have been very kind to me. However for all those of you who don’t have the time or inclination to learn more about investing in stocks directly, mutual funds are a great way to invest and be part of India’s economic growth.

Just remember investments are like seeds, and will grow into wonderful trees only if you give them time.

Happy Wealth Creation!

- Yogesh Chabria

The author is an investor and bestselling author. His latest book Invest The Happionaire Way should hit bookshops near you within a few months. You can connect with him by visiting his blog at www.blog.happionaire.com and don’t forget to subscribe to his free newsletter. You can write to him at yogesh.chabria@moneycontrol.com

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