i Develop Stocks Advisory

What you just should not believe!

I would totally go for that slightly suspicious brand of washing powder if it comes with a bar of soap free. But that is where I would draw the line.

The problem begins when the supermarket enters the financial market!

Take this, for example: A particularly innovative distributor of financial products offers 1 litre of cooking oil free with every investment of Rs 1,000. And investing Rs 10,000 gets you five kilogrammes of Basmati rice.

Absurd? Well, that scheme caught on like wildfire!

The race is on to grab a share of the mystified investors' wallet! And mutual funds are a good place to start. The choices and technicalities they present are so confusing that people would rather leave the choice to 'trusted' distributors.

We go myth busting and tell you what not to believe.

Should I believe: New Fund Offers are the place to invest?
Verdict: No!

Why: NFOs are tempting. They cost only Rs 10. Your agent may suggest that you invest in every NFO that hits the market simply because it is cheaper than other older funds.

But cheap is not necessarily good!

In a mutual fund, what matters is how your scheme performs, not how much a unit costs. If you invest Rs 10,000 in an NFO, you get 1,000 units of Rs 10 each. If the scheme grows at 10 per cent in the first year, you will have Rs 11,000 at the end of that year.

Had you invested Rs 10,000 in an existing scheme at a price (called Net Asset Value or NAV), of Rs 50 per unit, you would get 200 units. But for all you know, that scheme could perform much better and give you a return of 15 per cent.

So your investment would grow to Rs 11,500 at the end of the year.

Should I believe: Invest just before dividend is declared?
Verdict: No!

Why: Dividends are joyous occasions. They are a share in the profits that a scheme has made. So why not jump in right before they are announced so you can get some of the action?

But look before you leap!

Let us say the NAV of a scheme is Rs 10 when you bought it. Soon after, the company declared a 20 per cent dividend, which is Rs 2 per unit.

Now you get a cash dividend of Rs 2. Yet, your NAV falls to the extent of the dividend paid out to Rs 8 from your purchase NAV of Rs 10.

So, overall, it is a rather pointless exercise.

Should I believe: Book profits and re-invest?
Verdict: No!

Why: I have been guilty of booking profits because it is nicer to make money ever so often than wait it out!

But Financial Planner Lovaii Navlakhi explains why nice is not necessarily smart: Once upon a time, there were two sisters, Bunty and Babli.

Bunty was younger, more impetuous and impatient. Babli was sensible and generally a good sort.

Bunty wants a 30 per cent annual return but she chose to break it up into 10 per cent every four months. Babli researched her options and decided to hold her investment for the next three years, expecting a modest 20 per cent per annum.

Here is how hidden devils such as entry load and short term capital gains tax ruined Bunty's party.

Invested amount	Entry load @ 2.25%	Net invested	Return @ 10% pa	Amount with gain	Short term capital gains @ 10%	Net amount
100	2.25	97.75	9.78	107.53	0.98	106.55
106.55	2.4	104.15	10.42	114.57	1.04	113.52
113.52	2.55	110.97	11.1	122.07	1.11	120.96

Instead of 30 per cent, Bunty did not even get a 21 per cent net return!

No you would want to ask: How in the world do I protect myself from this misinformation?

Simple: Get informed. The best place to start is the offer document of the fund you are investing in. Never fail to read it. There is tons of free information and research available on fund web sites.

Buying oil may turn out a lot cheaper than getting it free with your investment, so don't rush into anything for the wrong reasons.