5 Bad Mutual Fund Advice To Ignore

1. Purchasing units in a New Fund Offer (NFO) gives returns sooner:
   1. Unlike the Initial Public Offering (IPO) of stocks, New Fund Offer does not result in post-offer gains or listing gains. In the case of NFO, investors purchase mutual fund units at a certain Net Asset Value (NAV) per unit.
   2. A lower value does not necessarily mean that the units were bought at a cheap price. NAV represents a fund's per unit market value. Once the units are purchased, the fund house then determines where to invest the money and the investment is done in a phased manner.
   3. Therefore, investors cannot possibly know whether the NFO was bought for a cheap price or whether it will provide gains. Similarly, purchasing funds with lower NAV does not mean more gains.
2. Selling funds upon declaration of dividends:
   1. Fund houses are not permitted to declare dividends in advance because investors may buy a fund prior to dividend declaration in order to get a dividend soon after.
   2. Further, investors sell their mutual fund units under the assumption that they have made some quick money. Unfortunately, that is not the case as the NAV after dividend would be reduced by the dividend amount.
   3. What's more, investors fail to let the fund increase in value (also known as compounding) as they take the money out too soon. The purpose behind investing in equity funds is wealth creation. This is not possible if the money is taken out quickly without giving the fund sufficient time to perform.
3. Exchange Traded Funds (ETFs) are a better investment option than regular funds:
   1. Although ETFs have lower expense ratios (because they are passively managed) it does not mean that they can outperform diversified equity funds. In the Indian market, there are fewer indices than in the western market and hence it is easy for active fund managers to beat ETF indices easily.
   2. In such a scenario, it is wise not to put an investor's entire portfolio in passive options like ETF that may produce suboptimal returns. Different markets require different investment approach.
4. Opt for mutual funds with low expense ratios:
   1. Like with any other investment tool, investors have to pay a certain fee to a fund house's Asset Management Company (AMC) for the services of running a mutual fund, marketing it, and distributing it.
   2. The returns that an investor gets is post the expenses incurred, known as the expense ratio. Some fund houses may charge more than others. Fortunately, the regulator - Securities and Exchange Board of India (SEBI) has put a limit on the charges on NAV.
   3. If the returns one gets after the expenses is high, it is indicative of a fund delivering well. ETFs have lower expense ratios as they are not actively managed and they may also under-perform when compared to active funds which have higher expense ratios.
   4. Therefore, it is not wise to purchase funds just because they have a lower expense ratio compared to others as they are not indicative of a fund's performance.
5. Choose funds with the highest returns:
   1. Opting to invest in funds with the highest returns can backfire if an investor's risk appetite is not on the same scale. Funds with high returns also come with high risks and huge fees. Therefore, investors should choose funds not on the basis of someone's suggestion but based on their investment needs and risk appetite.

It is wise to seek the advice of mutual fund managers with years of experience in the field rather than getting it from family or friends. Also, it is important to remember that a bad financial advice like choosing to invest in mutual funds by timing the market or choosing mutual funds based on just their past performances can result in failure. Therefore, take the time to research mutual funds and understand its complexities before investing.