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?
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 ₹ 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
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23 comments
Add a comment ↓Dear Sir
When ever opening the new SIP i MF people Following the two method. 1. Once Fund selected to invest it in directly in AMC 2. Second to Invest through GROWW/Paytm /ET money kind of portals.
Which is safe ? above scam for DMAT account and trading in stock without concern of account Holder ?
Both methods are safe. Even if are investing through 3rd party portals, you can directly visit AMC website and check your holdings. I would recommend avoiding investing in MF through demat account. I would provide seperate article about pros and cons of investing through demat account in coming days
PL.WRITE ON BEST INDEX FUNDS AND ITS COMPARISON ACROSS AMC,WHICH ONE IS BEST AND COMPARE WITH SAME HOUSE ETF OR BENCHMARK.
I already analysed this earlier. Here is the link. https://myinvestmentideas.com/2019/11/best-index-mutual-funds-to-invest-in-india-in-2020/
You couldn’t be more wrong.
These fund houses either use Cams (myCams) or Karvy for managing these funds. Now you won’t be able to find Google results for them ‘frauding investors”; until you dig deep on Google or just happen to pass their Facebook page reviews. Like this comment by Nitin Sethi- https://www.facebook.com/permalink.php?story_fbid=2120166474770710&id=100003321340823
or this-
https://www.facebook.com/nimesh.prakash/activity/10154983058339715
Karvy is no different. but I must admit Cams is BEST AMONG THE WORST.
The other day I closed my Demat account with SBI capital; because after reading this-
https://www.moneylife.in/article/wiped-out-by-motilal-oswal-an-aggrieved-small-investor-won-in-consumer-court-but-got-shafted-by-sebi/28666.html
I lost faith with the SEBI.
I am going back to the tried & tested, good ‘ol real estate to park my funds. Even though 80% of my net worth is already in real estate.
I agree with your suggestion. It’s indeed a good practice to invest in a decent amount of mutual funds.
That’s a well written blog. Thank you.
Thank you Rahul
Hi suresh…
I have expected that you will also discuss the running scam of mutual funds. It is that some companies are giving perks to investment managers of mutual funds to invest the public money in their companies. Can we believe, investment managers really don’t that particular company is going to sink?
I agree Kalyan. Here I am talking about things which are in the hands of investor. If companies are giving perks to investment managers which is not in the control of investors. How investor can protect themselves regarding this? My moto is to talk about things which are in the control of investors.
Ok sir…
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.
Can you name some mutual funds which do not invest in Indian Equity?