Portfolio diversification is another tool investors should use to reduce risk. "Early investors should avoid over-exposing themselves to equity market risk. They should spread their portfolio across equity, fixed income and liquid funds," says Mudholkar.
The survey also highlights that investors expect future performance to exactly mirror past successes and failures. Experts say that investors need to be made aware of the law of mean reversion. An asset class that has outperformed in the recent past will not always continue to do so. The same goes for an asset class that has underperformed.
"Investors should go more by long-term average return to estimate what returns they can expect from a particular type of mutual fund," says Vipin Khandelwal, a Sebi-registered investment advisor who also runs Unovest, a platform for investing in direct funds.
Another interesting finding relates to the holding period of mutual fund investments. While a high percentage (58 per cent) of investors claimed to hold their mutual fund investments in times of market volatility, in reality, their holding period was very short (see table).
"When people start investing, they churn their mutual funds a lot. Many investors treat mutual funds just like stocks, thinking that these need to be traded and actively managed. It is only later that they settle down and start investing for the long term," says Khandelwal.
"Many people are also impatient. As soon as they see that the fund has gone up 30-40 per cent, they think it is time to book profits. Investors also sometimes depend on star ratings. When they see that a fund has acquired a five-star rating, they switch from their lower-rated fund to the five-star fund," he adds.
In the process, they at times end up paying tax and exit cost, and also enter a five-star fund just when its hot streak is coming to an end.
News Source - Business Standard