Smart Stock Trading Tips for Mutual Funds Investor
Mutual funds are preferred by retail investors, so it is important that they understand method of operation of mutual fund managers. Mutual funds are easy investments in online trading but they have a built-in disadvantage because of their operative elements.
Clients pay for things like financial decision, management, analysis, administrative fees, and brokerage expenses, which can range from 0.2% for an index mutual fund up to 2% or 4% for some managed funds. The 75% of mutual fund managers that are not able to beat the Nifty index 500 still get paid, and they get advance payment even before the investors regardless of how well they perform or fail to make profit for investors.
Let us take a simple example, if they manage an investment pool of ₹100 million mutual fund and their pay is 1% of the fund, they could easily make ₹1 million a year even if they do not show desired results. If their administrative fee is 2% of AUM (Assets Under Management), then by ideal trading practice, they must at least beat the Nifty index 500 by 2% just to break even. One reason that many mutual fund managers fail to beat their index is that they have to start with the amount of their administrative fees, in order to beat effectively, this means essentially starting in the hole showing confidence in their decision.
On the other hand, few full time mutual fund managers can beat the market because they choose to forecast the future performance instead of actually reacting to the conditions. They mostly rely on their own decisions which is again based on their perceptions and opinions instead of following the price trends. Their selfish motive is to keep their inventive coming on time and secure their job safe. In a way, you pay for their fees apart from demat account charges.
Outperforming their benchmark becomes secondary objective, so they usually play a defensive strategies of investing in selected popular stocks.
Financial Investors and strategic traders instead have shown historically how they beat the market over long periods of time. They do deep analysis and have intrinsic different approach from typical fund managers.
Mutual fund managers lack intention so keep invested in stocks except for the cash that they must hold for their own beneficial redemptions. They move through different sectors, but they can’t go to cash during pullbacks, appreciation, depreciation, recessions, and bear markets. When collective sentiments ride, they can capture the upside of the market, but they usually can’t secure investments of their investors from the downside. In an upward market trend, this can be an easy ride. It’s very difficult when the trend ends and you lose your hard earned investments while the mutual fund manager still gets a predefined share, that too on your investment.
The first decisive step for investors must be to beat buy and hold, move from active mutual funds to passive index mutual funds that have small management fees, or to index ETF (Exchange Traded Funds). By making this small change, and migrating from active to passive investing, you increase your annual returns by 2%, this has big impact in your earnings if you have made heavy investments. This let your money compound on long-term basis. Outperformance of an index do not happen automatically for smart investors, it occurs because a stock investor or trader understands that asset prices incompletely reflect the actual sentiments of the majority traders.