Common Mistakes in Scheme Selection — Distributor Pitfalls

The biggest mistake new distributors make is treating mutual fund distribution like product selling rather than advisory. When products are sold, what pays the most commission or what is easy to sell (recent top performer) gets pushed. When proper advisory is practiced, the recommendation is what is right for the client even if it is harder to explain or pays less commission. The following are the nine most common and destructive mistakes: Mistake 1 — Chasing Past Returns (Recency Bias): The number one mistake in the industry. A fund gave 45% last year, so it gets recommended to every client. But that 45% was driven by a sector bet that may not repeat. By the time the client invests, the cycle may have turned. Data shows that last year's top-performing fund category is often next year's underperformer. The focus should instead be on consistency (rolling returns) and risk-adjusted performance (Sharpe ratio) over 5-10 years. Mistake 2 — Over-diversification: Portfolios with 18 funds across 4 AMCs are surprisingly common. The client thinks they are diversified, but 80% of those funds hold the same top 30 stocks. They are paying active fund expense ratios (1.5-2.0%) for index-like returns. Solution: 5-6 well-chosen funds with distinct mandates provide more than sufficient diversification. Mistake 3 — Ignoring Expense Ratio: A 0.5% difference seems trivial. But on a ₹50 lakh portfolio over 20 years, at 12% return, the difference between 1.5% and 2.0% expense ratio is approximately ₹15-18 lakhs in lost returns. Many distributors do not realize how compounding amplifies small differences. Expense ratios should always be compared within the same category. Note that the transition from TER to BER (Bundled Expense Ratio) from April 2026 will bring greater transparency to expense structures. Mistake 4 — Sector/Thematic Concentration: NFO seasons bring exciting themes — infrastructure, digital India, electric vehicles, defence. New distributors over-allocate to these because they are easy to sell (great narrative) and often pay higher upfront commission. But thematic funds are inherently cyclical — they outperform spectacularly when the theme is in favour and underperform painfully when it is not. SEBI has introduced portfolio overlap caps of 50% for thematic/sectoral funds, but thematic exposure should still be limited to 10-15% of equity allocation maximum. Mistake 5 — Not Considering Tax Impact: Every switch or redemption has tax consequences. A distributor who recommends switching from Fund A to Fund B every quarter based on recent performance is generating unnecessary tax liability for the client. Each switch in equity before 1 year triggers 20% STCG tax. Equity LTCG is taxed at 12.5% with a ₹1.25 lakh annual exemption. Switches should be planned strategically — aligned with financial year tax planning and the LTCG exemption. Mistake 6 — Commission-Driven Recommendations: This is the ethical minefield. Regular plan commissions vary from 0.3% to 1.5% across categories. The temptation is to recommend the category or AMC paying the highest trail commission. But recommending a small cap fund to a conservative retiree just because it pays 1.2% trail versus 0.5% for a debt fund violates suitability norms and risks the client's financial wellbeing. A distributor's reputation and long-term business depend on doing right by the client. Mistake 7 — Ignoring Asset Allocation: Some distributors put every client in 100% equity — "equity gives the best returns." Others put everyone in balanced advantage funds — "it is safe for everyone." Neither approach works. Asset allocation must be customized based on the client's risk profile, goals, and time horizon. The allocation decision matters far more than the fund selection within each category. Mistake 8 — Not Reviewing and Rebalancing: Setting up SIPs and disappearing for years is not advisory. Markets move, allocations drift, fund managers change, client situations evolve. Without annual reviews, a well-designed portfolio slowly becomes misaligned. The distributor who reviews and rebalances annually retains clients for decades; the one who does not loses clients to the next person who pays attention. Mistake 9 — Setting Wrong Expectations: "Invest in this equity fund and get 15-20% per year." This is the fastest way to lose a client. Equity returns are volatile — the client will have years of 25% and years of -15%. If the expectation is set at 15-20%, the -15% year feels like failure and betrayal. The correct approach is to educate: "Over 10-15 years, equity has historically delivered 12-14% CAGR, but individual years can vary from -30% to +50%. The discipline of staying invested through all conditions is what delivers wealth." Realistic expectations must be set from day one.