In an earlier article in bl.portfolio during the October 21 market peak, we had elucidated three mistakes to avoid when building an MF portfolio. As markets touch new peaks and MF investors grow in leaps and bounds, here are three more to add to that list:

# 1 Singular loyalty

Recently, a reader wrote to bl.portfolio’s Fund Query column saying that for his retirement goal, he had chosen to begin a SIP in a single fund that celebrated its milestone anniversary the same year. Today, a few years into his investment, he is now worried that the fund is a bottom-rung performer and has sought our guidance.

Publicity on a fund reaching a milestone of, say, 20 or 25 years — showcasing good CAGR returns since inception on both lumpsum and SIP investments — is common. If such FOMO (fear of missing out) opportunities are dictating your choices, keep in mind that in reality, only very few investors would have held on for the entire period and enjoyed the returns. There is no guarantee that this fund would continue to deliver well for the next 20 or 25 years and even if it might, you may not have the perseverance or patience to hold through thick and thin, to see it to the end.

Besides, even as you choose to put your money in a single fund based on milestone returns, you may find funds in the peer group faring better on long-term return and risk metrics, if you do a bit of research. Thus, seeking that one fund which will deliver the goods may be a futile exercise for most investors.

Similar is the case with betting on one fund house. A few years ago, when a colleague who was keen on starting SIPs approached the bank where she had a salary account, she had all her five SIPs initiated in the AMC arm of the same institution by her relationship manager!

This may not be a great idea. For one, just as the market works in cycles, fund houses also go through ups and downs due to their reading of the market, the weights of the positions they take in individual stocks as well as their investment styles. So, all funds could sink or swim together in terms of performance for a period of time, relative to peers or the broader markets.

Secondly, there may be event risk which, in future, could make you rue putting all your eggs in one basket. When Franklin MF’s debt fiasco broke out, it was a double whammy for the equity side where funds were already reeling under so-so performance across many categories. Ditto with front-running issues at Axis Mutual Fund which has given sleepless nights for investors, who again wrote to us on what to do with their investments here.

Thus, it may be more practical and sensible to hold a reasonably diversified portfolio across fund categories and fund houses, as per your risk-return expectations.

#2 Solution funds as ‘THE’ solution

Once, a friend went into panic mode when, during a causal conversation, this writer told him about the Sukanya Samriddhi Yojana for the girl child. Here is a scheme made out for the girl child, and there he was, unaware of it and investing elsewhere for her future, he thought. Another colleague, who used insurance as a savings vehicle for most of his goals (not a great idea really), was looking to secure his child’s future. He was outraged when an insurance agent pitched a children’s plan which, among other things, covered the life of the child, assuming the parents continued to live! How thoughtless and heartless, he whined. In both cases, these investors assumed that if there is a labelled product for children, it is a ‘must have’. It sure was FOMO.

If you have a child under 18 and want to save for his/her future, children’s funds are on offer. The key distinguishing feature of children’s funds is that they have a lock-in of five years or till the child turns 18, whichever is earlier. However, what many investors may not know is that children’s funds can fall under any category — ranging from flexi-cap to aggressive hybrid to balanced hybrid and even conservative hybrid.

Assuming your child is just a toddler and you have a decent risk appetite, would you want to invest in a conservative hybrid fund? Assuming you can’t take too much ups and downs, would you sign up for a flexi-cap fund with a ‘children’ label ? Besides, some children’s funds also have exit loads (which can eat into returns) if you pull out the investment before the lock-in ends (for emergencies) as well as before child turns 18. So, even if it is an underperformer, you may have to think twice before exiting.

If you are saving for your child, children’s funds are not a must have. Any normal fund aligning to your risk-return expectation as well as time horizon might be just as good and could give more flexibility. Similarly, retirement funds don’t have to be used at all to save for retirement, as a reader, who wrote recently to us, assumed.

#3 Thematic funds for short-term goals

Following SEBI’s strict categorisation rules, there is hardly any room for innovation in the regular fund categories. Hence, in the NFO boom since Covid, innovations have invariably been on the passive side or in the form of thematic/sectoral fund offerings on the active side. In most cases, launches also happen at a time when the theme is in vogue and is outperforming the broader markets.

For instance, this writer was asked by a friend whether a recent NFO focused on defence stocks would be a good choice for a child’s higher education goal, three years down the line. It was clear he needed his corpus multiplied quickly and the massive run in PSU stocks had caught his attention, just like that of the fund house’s.

When it comes to diversified equity funds, it is somewhat an established fact that investors need to have a 5-to-7-year timeframe to optimise risk-return aspects, especially when it comes to saving for key goals. Funds with a track record are also preferred here. However, investors seem to be approaching thematic equity funds — which already entail higher risks — differently, trying to make hay when the sun shines.

While a tactical entry-exit approach may work for thematic funds, the timing of the entry and exit matters. Entry at a high, with a short timeframe in mind is like investing assuming there is no downside risk. For tactical entry-exit, a contrarian approach may reduce risk for thematic funds — for example, an entry into IT sector fund last year instead of the defence fund for someone with a three-year timeframe in mind.

That said, since one cannot exactly second-guess market rotation, it is best to not have thematic investments for key goals. These funds should form part of your satellite portfolio, where you exit or at least book some profits when the going is good (without a strict investment timeframe in mind) and redeploy in your core savings or use it for, say, a vacation or a capital spend.