Ways to protect your MF portfolio from Mutual Fund Scams
Every year, mutual fund investments are increasing at a faster pace. While you are investing your hard earned money, you should also ensure that you protect your mutual fund portfolio? There was PNB, IL&FS Scams that hit the stock market in India. Investors have lost money during such scams. Till now, no one predicted about Scams in Mutual Funds Industry in India. However, we cannot rule out them in future. What are Mutual Fund Scams? How Mutual Fund Houses can inflate the NAV of the mutual fund schemes? Which are the Bullet Proof Ways to Protect your MF Portfolio from such Mutual Fund Scams?
What are Mutual Fund Scams?
Scam in simple term is a fraud. We have seen several scams recently like PNB Scam, IL&FS Scam which has created fear among the investor community. However, till now one could not hear any scams in Mutual Fund Schemes. We cannot rule away Scams in Mutual Fund industry in India. Your hard earned money can vanish in just few days or years with such mutual fund scam.
How Mutual Fund Scams can occur in India?
Though there are no signs of mutual fund scams in India till now, one cannot rule out this in future. Here are some ways how mutual fund scams can occur in India.
1) Mutual Fund houses can show higher NAV of a mutual fund scheme compared to actual NAV. E.g. X Mutual Fund scheme NAV could be shown as Rs 25 per unit, whereas the actual NAV value could be lower than that. In this scenario, investor’s portfolio is inflated (shown higher).
2) Mutual Fund houses can show lower expenses compared to actual higher expenses. Generally there is a cap of 2.5% (TER) in a mutual fund scheme. However if the amount exceeds, there are chances they can still show 2.5% and adjust their books.
3) Mutual fund schemes can show fictitious shares/stocks under their portfolio to show higher NAV.
4) Mutual fund schemes can show fictitious assets to inflate the assets in the balance sheets. While company might be making losses, in reality it can show profits. When such scam bursts there would be redemption pressure and such mutual fund house can go bankrupt.
5 Bullet Proof Ways to protect your MF portfolio from Mutual Fund Scams
None of these things are in the control of investors. In such case, how an investor can protect themselves for any such mutual fund scams that may arise in future. While there is no 100% chances to protect from such scams, there are some bullet proof ways where you can protect your mutual fund portfolio.
#1 – Invest in 5-8 mutual funds instead of 1-2 funds
I keep recommending investors that if you are investing in just 1-2 funds and they burst down on performance one day, then what happens? The same logic can be applied here too. One can invest in 5-8 mutual fund schemes to protect from mutual fund schemes. In such case if there is mutual fund scam pertains to one of your mutual fund schemes, still 90% of your portfolio may be safe.
#2 – Don’t invest all your funds in the single MF fund house
If you are investing in a single mutual fund house schemes, what happens if there is mutual fund scam? All your money would vanish. The best way to protect from such scams is to invest in 4-5 mutual fund AMC schemes.
#3 – Diversify your mutual fund portfolio
Don’t go overboard on just midcap or smallcap or large cap mutual fund portfolio. What happens if we discover mutual fund scam which reveals it happened in midcap or small cap segment of funds. All your midcap or small cap funds would suffer huge losses. Best way is to invest in largecap, midcap, smallcap, diversified and balanced funds for equity mutual fund investments.
#4 – Check Peer comparison
If your mutual fund is performing well, don’t celebrate. Just check how the peer funds are doing. If peer funds are suffering losses and your fund is showing huge returns, something is cooking up. Keep an eye and make sure it is due to good performance of the mutual fund scheme and it is not because of some over statement of numbers.
#5 – Invest in some funds that don’t invest in Indian equity
You might get doubt that what happens to my mutual fund investments if the entire mutual fund industry collapses in India. Two months back when IL&FS scam revealed, some mutual fund houses has written off the amounts. What happens if we see such thing across industries where your fund would have invested? While SEBI would take all steps in ensuring such things won’t occur, you can invest some funds that don’t invest in Indian equity. You can add some funds in your portfolio like debt funds, international mutual funds etc.,
Conclusion: We are seeing several scams occurring in the recent past. It is better to safeguard your mutual fund portfolio now instead of thinking when it actually occurs. Adopt this simple mantra of investing in 5-8 mutual fund schemes that contain large cap, midcap, smallcap, diversified and balanced segments across various mutual fund houses and keep some money in debt funds or international funds.
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Bullet Proof Ways to protect your MF portfolio from Mutual Fund Scams