Have you seen the ad ‘Mutual funds sahi hai’? It is very true. However, there are a few types of mutual fund schemes which you should try and avoid or NOT invest in. Yes! You read it right! Today we will look at which mutual fund schemes to avoid.
As we already know, mutual funds are one of the best tools for long term wealth creation. However there are certain categories of funds which are risky and not really suitable for wealth creation. Let’s look at these in today’s post.
Thematic/ Sector mutual funds
These funds invest in a particular sector only. So let’s say it is a technology mutual fund. The fund will invest the entire corpus in stocks of IT and technology companies only. The risk will be high as the portfolio is concentrated only in one sector. If due to some reason, the sector doesn’t perform well, it will also translate into the returns of the mutual fund.
Fund of funds
Here, the mutual fund invests money in various other mutual fund schemes available in the market. In these funds there is very high risk and also lower control for the fund manager, as he cannot decide which stocks to invest money in. Money can also be invested in hedge funds which are super risky. Fund of funds is a MUST avoid category.
Credit risk mutual funds
These mutual funds invest in low credit quality debt securities. The fund managers invest in instruments where they anticipate an upgrade in credit rating. As the investments are of low quality, a credit rating downgrade can negatively impact the performance of mutual fund.
Small cap funds
Small cap funds are the riskiest of all equity mutual funds. The NAV of these funds is volatile and very sensitive to underlying market conditions. If the market conditions are not good, then investors can suffer losses. Having said this, small cap funds also present an opportunity to be a part of a growing companies and make big returns as the businesses grow large over time.
Investors should invest only a small portion of their savings in small cap mutual funds and remain invested for a long period to reap good returns. However, these are not the funds for long term wealth creation and corpus building.
Hybrid funds
Hybrid funds invest in a combination of equity and debt instruments. The risk of the fund depends on the allocation between equity and debt. It also varies depending on whether the fund is investing money in large cap stocks, mid cap stocks or small cap stocks. It is important to study the composition of the investments before investing in these funds. Moreover, regular monitoring of investment is also necessary.
International funds
International funds cater to different international markets, commodities, indices. Some are also fund of funds. All this means you have to pay more attention to your investment. You also need to keep a watch on which countries or indices the fund is investing in. International diversification does not always translate into great returns. Generally, developed economies offer modest returns. An emerging market like India can offer solid returns over a long period of time. This is why small retail investors should stay away from international mutual funds.
In this post, we have tried to cover all the types of mutual funds which we believe an average common man should NOT invest in. One must remember that being wealthy is a long term journey. It is important to know what to do. But it is immensely more important to know what NOT to do in investing.
