3 Rookies Mistakes First-time Direct Plan Investors Should Avoid

There's no denying that Direct Plans in Mutual Funds are on the rise. Per AMFI data, 45.7% of all investments made from the top 15 cities, and 21.7% of investments made beyond the top 15 cities in August '17, were into direct plans. By allowing investors to deal directly with the asset management company, direct plans lower their expense ratios, which are in turn passed on to investors in the form of slightly elevated annualised returns.

Anecdotal evidence would suggest that only a miniscule percentage of these direct plan investments are being made based on the advice of a fee-charging intermediary (such as a SEBI Registered Investment Adviser). Essentially more investors are gaining the confidence to select mutual funds on their own. How these investors will fare in the face of the inevitable vicissitudes intrinsic to all securities markets, only time will tell. In the meantime, here are three mistakes you must avoid if you're planning to go direct.

Ignoring Risk Profiling - or not fully understanding risks
Only a small handful of direct plan investors actually make the effort to understand their own tolerance to risk; or for that matter, the risks associated with the fund itself. Before investing, make sure you take at least a cursory risk profiling quiz from the internet, to understand whether you're a conservative, moderate or aggressive investor at heart. Having done this, also take into account the length of the goals that you're saving or investing for - for instance, if you're saving for your retirement which is a few decades away, but are a moderate risk-taking investor, you may want to manually override your individual risk tolerance and invest into more aggressive funds such as diversified equity funds. Remember - market cycles tend to repeat themselves, as financial markets have notoriously short-term memories! Go through the worst month, quarter and year return of the fund you're contemplating (available on trustworthy information sites such as ValueResearch) and ask yourself whether you'd be willing to stomach such a deep cut in the future. In a nutshell - consider the risks associated with your chosen fund before you finally do sign above the dotted line.

Investing into NFO's - or because the fund's "NAV is low"
Many Direct Investors fall for the lure of NFO's (New Fund Offers) simply because they're being "launched at an NAV of Rs 10". The same misguided notion also compels them to sometimes scout out and opt for funds that have lower NAV's, as they falsely believe that this would impact the future growth potential of the fund. There are two things to keep in mind here. One, low NAV does not equal cheap and does not dictate the potential for growth. Whether a fund's NAV is priced as Rs. 10 or Rs. 100, it will grow your money at the rate that it's underlying portfolio of securities grows. Second, NAV's often end up underperforming their more well-established counterparts for a multitude of reasons - higher expense ratios, untested investment philosophies, and weaker fund management teams, to name a few. If you're going direct, pick a fund with an impressive track record over several years, and of navigating at least three market cycles.

Investing based on short-term past returns, or being lured by marketing spiel
It's not uncommon for direct plan investors to allow the previous year's returns to dictate their investment decisions. This can backfire heavily because a one-year return could just as well have been the outcome of one or two lucky stock calls that paid off - something which may or may not be repeated during your investment duration. Additionally, investing in a fund after it has gone up heavily could actually mean that you're buying into a portfolio of expensive stocks, which is due for a correction in the short term. When selecting a fund, do not be lured by short-term performance stats or well-crafted ad-jingles. Choose consistency and a robust fund management philosophy instead.