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

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?)