Having too many funds, and some of them laggards

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In April-May 2017, Mint had surveyed 19 financial advisers to know some of the biggest mistakes investors make (read them at bit.ly/2p2Va8U and bit.ly/2qxzhgG). Over the next few weeks, we will talk to more advisers about these mistakes (read about them at: www.livemint.com/investor-mistakes). Vinod Jain, principal adviser, Jain Investment Planner Pvt. Ltd, a Mumbai-based distributor of financial products, talks about his experiences.

Mutual funds by the kilo 

One of the first things that Jain often notices in a new client’s portfolio—and we’ve heard the same grouse from several other financial advisers as well—is the sheer number of mutual fund schemes. This problem is especially acute with investors who have been investing for many years. “In the 2004-08 period, there were a lot of new fund offers by almost all fund houses. Since equity markets went up in those years, it was easier for fund houses to sell new schemes ,” said Jain. New strategies also keep hitting the market with regularity; an arbitrage fund yesterday, an equity savings scheme today, and so on. Jain says it’s not uncommon to spot a variety of strategies in most new portfolios.

How to trim the portfolio? “We try and see which strategy works today. There could be strategies that may have worked well in the past. We have to start removing all such schemes that we don’t think would work, going ahead,” he said.

A side effect of amassing so many mutual funds is that investors end up having schemes that no longer perform. Jain points out that some schemes are not in as much focus for the parent fund houses too as they were at the time of launch. “Building a successful mutual funds portfolio doesn’t require you to look at net asset values every day. But you need to look at your portfolio twice or thrice a year and know why the schemes are there and what they are doing there,” said Jain.

Expensive loans 

Real estate has been an Indian investor’s favourite investment vehicle. There’s nothing wrong in buying a home, even a second home, but it’s when we borrow excessively to fund our second home that it becomes a problem. Jain has seen many clients spend years paying for loans for properties they may not even need. “When we do a review, we ask our clients if they see themselves living in their home in the future. If the answer is no, we advise them to sell off such properties. The problem is that in present conditions, many such investors are not able to sell their properties easily,” he added. There is no point in paying large equated monthly instalments (EMIs) to buy properties if the investor won’t receive even half of that as rental income, he said. By selling such properties, an investor can pay off not just that specific housing loan but also other loans that she may have, and thereby deleverage.

 Lending without credit appraisal 

If taking unnecessary loans is bad, then lending money can also backfire, said Jain. Often, he comes across cases where clients have lent money to friends or family without proper credit appraisal. Mostly driven by emotion, he adds. “If I give a loan without assessing if the borrower would be able to repay, then I am not just hurting my own recovery prospects, I am also hurting that person in the long run, because I am making her irresponsible,” he said.