5 Bullet Proof Ways to protect your MF portfolio from Mutual Fund Scams

Bullet Proof Ways to protect your MF portfolio from Mutual Fund ScamsWays 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?

Also Read: Best Low Risk High Return Mutual Funds to invest now

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.

So on…..

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.

You may like: Top 5 Best ELSS Funds / Tax Saving Mutual Funds to invest in 2019 

#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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Suresh

Bullet Proof Ways to protect your MF portfolio from Mutual Fund Scams

Suresh KP

21 comments

  • Kumar

    Hi Suresh,

    Interesting read and very good info for a DIY investor. I would need your review on 2 things?

    1. Suppose I am investing in an Open-Ended Equity Fund for a long term goal (say 12-15yrs), what do i do if the fund does well for intial 2yrs but starts to perform badly post 2yrs? Do I stop my SIPs and move to a new funds or should I quit all my money and migrate as a STP to a new fund etc? I believe every investor is stuck with this problem and hence it results in folks having 20-30 funds in their portfolio.

    2. Could you do a separate review of the risk in Fixed Deposits with digital banks and NBFCs. My parents are eager to invest in FDs with high return potential but think no risk is attached. (Ex- Jana Finance Bank 9.75% interest for Senior Citizens).

    • Hello Kumar, Here are my comments 1) If your fund is not performing well, you need to wait for 1-2 years time to conclude whether it is not performing in line with peers or not. If not, you can review and exit 2) I would do that in seperate article.

  • Sridhar Iyer

    Can you name some mutual funds which do not invest in Indian Equity?

  • Moneypitara

    Thanks for sharing such a useful information. Very well explained article.

  • Pravin

    Its very useful.But what abt overlapping betn two funds say multicap from two diff amcs?If scam occurs in stocks common in two funds then still there is risk.So funds with minimum common overlap is required.If its true then how to resolve this issue.

    • Hi Pravin, This is covered in point no.3. e.g. you can invest in diversified fund of icici mutual fund house and midcap fund of HDFC. You are investing in different AMCs and different category of funds. While it may be always possible to be 100% accurate, you can check and invest the mixture of these scenarios.

      • Pravin

        Thank you very much Sir for quick response.
        One more big issue is related to mf investing in finance sector upto 35%.I think in present scenerio its dangerous to have such large exposure in finance sector.
        Pl put your view in this point also

        Regards
        Pravin

        • Hi Pravin, I agree with you. However if we exclude finance / banking sector, then there is no other major sector to invest. Hence, mutual fund schemes would continue to invest in them. Identifying funds that invests in non banking/financial sector would be difficult (except in case of sector funds) for any investor.

  • Pradeep

    When you say bullet-proofing the portfolio, it must be literally that.
    None of the above ideas can protect the investors from losses even if its a small amount.

    • Ha ha. I know my competitors keep criticizing with such comments. Just google on this topic. You would not see any article from any of the top websites in India about mutual fund scams. They would wake-up and write when actual scam has happened. Our readers need earlier alert than post mortem. I may be trying few things. What do you really think about protecting mutual funds portfolio from mutual fund scams?

      • Pradeep

        Sorry there wasn’t any criticism in my comment, it was my frank opinion.
        If you see the scams in the recent past which includes Taurus, ICICI Securities, ILFS, Zee, DHFL, etc, it was not as if just one fund house or just one fund category that was affected. Today everybody is so worried that even Liquid funds are not safe.

        When scams get unearthed, its like a natural disaster and only luck can save you by not being at the wrong place at the wrong time. Otherwise whatever you do, you could lose money.
        A sub-prime scandal brought the entire world to its knees, much like ILFS threatened to do so 6 months ago. Rating agencies are no good, not sure if there is one fund house that does its own proper assessment of companies that they buy whether its stock or bonds.
        We all know fund houses charged higher amount on direct plans to reduce regular plan costs, which itself is a scam.
        Please remember MFs risks are real and no bulletproofing will keep the bullet out of here. You have already bitten the bullet before being here.

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